Économie et Statistique n° 341-342 - Investment and Financing of Firms

Economie et Statistique
Paru le : 01/07/2001
Consulter

Taxation and the Cost of using Capital: Effects on Investment, Business and Employment

Bruno Crépon et Christian Gianella

A measurement of the cost of capital based on individual corporate data and separating out the cost of self-financing from the cost of external financing finds a relatively broad distribution of the cost of using capital. This dispersion is explained partly by the high diversity of financing structures and partly by the variability of the cost of external financing. Changes in the distribution of the cost of capital are also associated with taxation changes, which affect self-financing and external financing differently. The construction of this cost of using individual capital is used to analyse the relations between production factor costs and volumes. To be more precise, the estimation of a labour demand system using taxation reforms as a source of exogenous variation in the cost of capital identifies the two mechanisms at work when factor costs change: a substitution effect and a profitability effect. The substitution effect is more frequently put forward when taxes on production factors change. This effect reflects a reorganisation of the productive mix. It determines the share of each factor in production. In addition to this effect, there is the impact of factor costs on the unit production cost, prices and ultimately demand for the company's production. This second effect is much more important than the first. An increase in the cost of a factor negatively affects the company's demand for each factor. In other words, following a rise in the cost of capital, production becomes richer in jobs, but decreases enough for the net effect on employment to be negative. Assuming that the cost of labour remains unchanged, a drop in taxes on corporate capital would have favourable effects on investment, employment and business.

Economie et Statistique
No 341-342
Paru le : 01/07/2001