{"title":"Assessing the impact of taxation on the effective tax rate and operational risk of capital investment projects under optimal capital structures","authors":"","doi":"10.1016/j.iref.2024.103589","DOIUrl":null,"url":null,"abstract":"<div><p>This paper proposes two metrics to correctly measure under optimal capital structures the impact of corporate statutory tax rates (a) on the effective tax rate, and (b) on the operational risk of capital investment projects and their parent firm's project portfolio. For illustrative and explanatory purposes as well as for ensuring a realistic coverage of a wide spectrum of risky capital investment projects, both metrics are applied to a stationary in mean and variance stochastic <span><math><mrow><mi>N</mi><mi>P</mi><msup><mi>V</mi><mi>τ</mi></msup></mrow></math></span> model under the Canadian open-class corporate taxation system. The Marshallian partial equilibrium adjustment mechanism is brought into play to ensure through efficient financial markets that firms operating within any domestic economic sector are concomitantly subjected to financial equilibrium conditions, thereby enabling firms to converge in the very short run to an optimal after-tax leveraged net cost of capital. This paper concludes that current macroeconomic neo-classical rate-based marginal effective tax rate (<em>METR</em>) metrics systematically and significantly underestimate business organizations' microeconomic <span><math><mrow><mi>N</mi><mi>P</mi><msup><mi>V</mi><mi>τ</mi></msup></mrow></math></span>-based corporate effective tax rates. Furthermore, increasing both the corporate statutory tax rate and the cross-correlation coefficient between portfolio projects will markedly increase a parent firm's project portfolio operational risk while impeding its capacity to reduce it.</p></div>","PeriodicalId":14444,"journal":{"name":"International Review of Economics & Finance","volume":null,"pages":null},"PeriodicalIF":4.8000,"publicationDate":"2024-09-05","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":"0","resultStr":null,"platform":"Semanticscholar","paperid":null,"PeriodicalName":"International Review of Economics & Finance","FirstCategoryId":"96","ListUrlMain":"https://www.sciencedirect.com/science/article/pii/S1059056024005811","RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":null,"EPubDate":"","PubModel":"","JCR":"Q1","JCRName":"BUSINESS, FINANCE","Score":null,"Total":0}
引用次数: 0
Abstract
This paper proposes two metrics to correctly measure under optimal capital structures the impact of corporate statutory tax rates (a) on the effective tax rate, and (b) on the operational risk of capital investment projects and their parent firm's project portfolio. For illustrative and explanatory purposes as well as for ensuring a realistic coverage of a wide spectrum of risky capital investment projects, both metrics are applied to a stationary in mean and variance stochastic model under the Canadian open-class corporate taxation system. The Marshallian partial equilibrium adjustment mechanism is brought into play to ensure through efficient financial markets that firms operating within any domestic economic sector are concomitantly subjected to financial equilibrium conditions, thereby enabling firms to converge in the very short run to an optimal after-tax leveraged net cost of capital. This paper concludes that current macroeconomic neo-classical rate-based marginal effective tax rate (METR) metrics systematically and significantly underestimate business organizations' microeconomic -based corporate effective tax rates. Furthermore, increasing both the corporate statutory tax rate and the cross-correlation coefficient between portfolio projects will markedly increase a parent firm's project portfolio operational risk while impeding its capacity to reduce it.
期刊介绍:
The International Review of Economics & Finance (IREF) is a scholarly journal devoted to the publication of high quality theoretical and empirical articles in all areas of international economics, macroeconomics and financial economics. Contributions that facilitate the communications between the real and the financial sectors of the economy are of particular interest.