Working Paper: CEPR ID: DP13277
Authors: Richard Brealey; Ian Cooper; Michel Antoine Habib
Abstract: The public and private sector costs of capital differ in the presence of taxes, because taxes are a cost to the private but not the public sector. We use a quasi-arbitrage approach to show how to include taxes in a comparison of capital costs. We find that taxes induce distortions that generate a systematic private sector preference for assets with rapid tax depreciation, high debt capacity, and low risk. We examine the implications of that preference for privatization, government outsourcing, and regulation. Our approach facilitates the analysis of transactions such as pure risk transfers, otherwise difficult using standard discounting methods.
Keywords: public sector; private sector; cost of capital; valuation; tax risk; debt capacity
JEL Codes: G18
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| taxes (H29) | costs of capital (private sector) (G31) |
| taxes (H29) | costs of capital (public sector) (H54) |
| costs of capital (private sector) (G31) | asset valuation (private sector) (G32) |
| costs of capital (public sector) (H54) | asset valuation (public sector) (H82) |
| taxes (H29) | systematic preference for certain assets (private sector) (G11) |
| systematic preference for certain assets (private sector) (G11) | investment decisions (private sector) (G31) |
| taxes (H29) | privatization decisions (L33) |
| taxes (H29) | government outsourcing decisions (L33) |
| taxes (H29) | regulation decisions (G18) |