Over the last ten years a series of empirical studies have been published that claim to test by statistical methods whether corporations,
faced with the imposition of a tax on their business income, can in the short-term increase the gross profits so as to maintain their net of tax rate of return on capital. These studies have used various methods but the results yield contradictory
evidence as to whether the proposition could or could not be accepted as having validity.
The results suggested that a fresh look at the theoretical analysis on the corporate tax be undertaken.
The methodology followed was to make a series of simplifying assumptions such that focus could be directed towards an examination of decision-making within the firm and within the industry on which the tax was imposed. For the firm the effective rate of tax is dependent not only upon the statutory rate of tax but also upon the depreciation provisions in force; with an effective tax rate greater than zero, the tax ceteris paribus reduces the rate of return on investment projects. However, it was found that to gain fuller results as to the effect of the tax, more detailed specification of the environment within which the firm operates is needed.
The classical models of pure competition and pure monopoly were studied; short-run profit maximisation is assumed in such models. The tax imposition led to the prediction that the after-tax rate of return fell in the short-run; in the long-run if the tax imposed on normal profits, capital moved out of the industry.
Consideration was then given to oligopolistic industries. Profit maximisation was still assumed, but with the realisation that over the planning horizon the firm, departures from full short-run profit maximisation were probable. The reasons for such behaviour were examined. The tax was then imposed. In particular cases the tax affected the constraints to allow price increases and an increase in the gross rate of return. In others the constraints remained unchanged and no short-run alleviating action was possible. Relaxation of the assumptions of the theoretical analysis was then allowed, so that testable predictions could be put forward. Several of the recent studies were then examined to see whether their framework,
data and estimating equations were adequate to test the hypotheses
put forward. The conclusion drawn was that the use of annual time series over forty years was inadequate for such a purpose. / Arts, Faculty of / Vancouver School of Economics / Graduate
| Identifer | oai:union.ndltd.org:UBC/oai:circle.library.ubc.ca:2429/36146 |
| Date | January 1969 |
| Creators | Wickham, Peter Hugh |
| Publisher | University of British Columbia |
| Source Sets | University of British Columbia |
| Language | English |
| Detected Language | English |
| Type | Text, Thesis/Dissertation |
| Rights | For non-commercial purposes only, such as research, private study and education. Additional conditions apply, see Terms of Use https://open.library.ubc.ca/terms_of_use. |
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