CoPS/IMPACT Working Paper Number OP-71

Title: Two Short Papers Detailing Enhancements to FH-ORANI

Author: R.A. McDougall


This document contains two short papers on the theoretical structure of FH-ORANI. The first paper is concerned with local ownership shares for fixed capital in individual industries. The second is concerned with the taxation of earnings of fixed capital. Each paper identifies shortcomings in the current treatment, proposes a new treatment, describes its computer implementation, and presents illustrative simulation results. The first paper proposes two changes relating to local ownership of fixed capital.

* In calculating industry shares in aggregate capital stocks, we assume uniformity across industries not in pre-tax rates of return, but in post-tax rates.

* In determining local ownership shares for individual industries, we do not assume changes in shares to be uniform across industries, but do require them to be jointly consistent with the change in the economy-wide average local ownership share. Illustrative simulation results show that the new treatment greatly increases the sensitivity of foreign income payments to changes in the economy-wide local ownership share. The second paper proposes several changes relating to taxation of earnings of fixed capital.

* Tax reductions arising from depreciation and investment allowances are not apportioned between fixed capital, working capital, and land, but are allocated entirely to fixed capital.

* The share of tax on earnings of fixed capital in total tax on non-labour income is not fixed, but varies in response to changes in the composition of non-labour income.

* Investors treat the reduction in tax arising from the investment allowance not as an augmentation to their income, but as a partial offset to the purchase cost of capital.

Illustrative simulation results show that the new treatment greatly increases the sensitivity of capital usage to changes in the depreciation and investment allowance.

JEL classification: C68, D33

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