Secuencia didáctica

To avoid distorting the mix of primary factors used in production (primarily the capital-labour ratio), the additional income from export sales is accounted for separately. This ‘sterilisation’ to quarantine the rental price of capital, which plays a key role in driving primary factor use in VURM, from the additional return on export sales requires some additional terms to be added to the relationships outlined in chapters 2, 3 and 4.

This approach results in two streams of capital income:

 income from the domestic basic price on all sales; and  additional income arising from the markup on export sales.51

Both streams of capital income continue to accrue to the owners of capital used in production (domestic and foreign), and to governments in the form of tax revenue. The transmission mechanisms are described in chapters 3 and 6.

With the introduction of the additional returns, the coefficients V1CAP and V1CAPINC now represent the streams of capital income that are consistent with the return on all sales valued at the basic price of domestic sales (but excluding the additional return) before and after production taxes, respectively. This income is used to derive the rental price of capital that flows through into the primary factor input decisions for current production.

The additional stream of income arising from the markup on export sales is assumed to flow directly to the owners of capital (domestic and foreign) and to the federal government (in the form of tax revenue). This additional income stream provides producers in VURM with an incentive to:

51 _{In the standard model, changes in the basic price of export and domestic sales are aligned and any all} returns are subsumed in the single basic prices. The accounting of the extended model therefore disaggregates measures in the standard model according to destination of supply.

 switch sales of existing production between the domestic and export markets, thereby increasing average returns; and

 vary the level of total production.

Income from the markup on export sales (E_d_addexpinc to E_d_nataddret_i)

Any markup on export sales over domestic sales will generate additional income (positive or negative) on export sales.

In level terms, the before tax additional return from export sale can be calculated as:

A = P4 × X4R − P0A × X4R A = (1 + M) × (P0A × X4R) − P0A × X4R

A = MA(P0AA × X4) (E7.5)

where: A is the additional return from export sales; M is the per unit markup on export sales; and

P0A × X4R is the value of exports in the absence of the markup on export sales. The value of exports in the absence of the markup on export sales is:

P0A × X4R = W4

(1 + M)= Alt_W4

Substituting this in (E7.5) gives:

A = M × Alt_W4 = M × W4 (1 + M)

In ordinary change terms this becomes:

d_A = M × d_Alt_W4 + Alt_W4 × d_M

But as:

d_Alt_W4 = 0.01 × W4

1+M× {p0a + x4r} and Alt_W4 = W4 (1+M)

Substituting these in give:

d_A = M × 0.01 × W4 1 + M× {p0a + x4r} + W4 1 + M× d_M d_A = 0.01 × M × W4 1 + M× {p0a + x4r} + W4 1 + M× d_M d_A = 0.01rA × {p0a + x4r} + W4

1+M× d_M (E7.6)

In VURM, the average technical change term ‘a’ applies to the total value of all production, including any additional return. Consequently, any change in the average rate of technical change will also impact on the additional return from export sales. To account for this, the following term is also included in the additional return from export sales equation:

sum{i,IND, 0.01*COM2IND(i,c)*[COSTS(i,s) - PRODCOSTS(i,s)]*a(i,s)}

The additional returns from the markup on export sales are recorded in two ways in VURM:

 by the commodity and source region, denoted by the coefficient ADDEXPINC and its change variable d_addexpinc; and

 by industry and destination region, denoted the coefficient ADDRETURN and its change variable d_addreturn.

Equation E_d_addexpinc determines the ordinary change in the additional return on export sales of each commodity from each region (in A$ million). The additional return can be made exogenous by setting d_addexpinc exogenous and swapping it with the shift term f_addreturn. This closure change could be undertaken in conjunction with those to turn the export transformation function off, which involves:

 setting the markup on export sales exogenous (p4markup); and  making the shift term f_x4r2 exogenous (chapter 9).

Equation E_d_addreturn maps the ordinary change in the additional return on export sales by commodity and source region to producing industry and region. As the distribution of the additional returns from export sales across regions may differ from the value of sales in the MAKE matrix, the coefficient COM2IND is used to the additional return to the corresponding industry in the same region.

Equation E_d_addexpinc # Change in the additional return on export sales by commodity & region #

(all,c,COM)(all,s,REGSRC)

d_addexpinc(c,s) =

0.01*ADDEXPINC(c,s)*{p0a(c,s) + x4r(c,s)} + [V4BAS(c,s)/POWERP4MARK(c,s)]*d_p4markup(c,s) +

sum{i,IND, 0.01*COM2IND(i,c)*[COSTS(i,s) - PRODCOSTS(i,s)]*a(i,s)};

Equation E_d_addreturn

# Change in the additional return on export sales by industry & region #

(all,i,IND)(all,q,REGDST)

d_addreturn(i,q) = sum{c,COM, COM2IND(i,c)*d_addexpinc(c,q)};

Equation E_d_addreturn_i

# Change in the additional return on export sales by state #

(all,q,REGDST)

d_addreturn_i(q) = sum{i,IND, d_addreturn(i,q)};

Equation E_d_nataddret

# Change in the additional return on export sales by national industry #

(all,i,IND)

d_nataddret(i) = sum{q,REGDST, d_addreturn(i,q)};

Equation E_d_nataddret_i

# National change in the additional return on export sales # d_nataddret_i = sum{q,REGDST,sum{i,IND, d_addreturn(i,q)}}; Taxation of the income from the markup on export sales (natw1gos_i)

It is assumed in VURM that both Australian and foreign owners of the domestic capital stock pay income tax on the additional return on export sales. The modelling of taxation occurs in the Government Finance Statistics module (described in chapter 5).

In the Government Finance Statistics module, federal government income tax is levied on all capital income, including from the additional return on export sales. In keeping with the convention adopted in the ABS Government Finance Statistics and consistent with the way other primary factor income (including capital income) is taxed in VURM, it is assumed that the additional return from export sales is taxed in the hands of the companies that initially receive the returns, rather than in the hands of the domestic and foreign households that ultimately receive that income. In this way, the additional return is taxed in the same way as other income accruing to the owners of capital. The additional return from export sales is added to equation E_natw1gos_i which calculates the national change in gross operating surplus. The percentage change in income taxes paid by enterprises is calculated from the variable natw1gos_i in equation E_d_wgfsi_132B. As a result, the additional return feeds through into the coefficient VGFSI_132. It also feeds through indirectly into the formula that calculates the effective company tax rate in VURM (TGOSINC).

Equation E_natw1gos_i # National value for w1gos_i #

sum{q,REGDST, V1GOSINC_I(q)}*natw1gos_i =

sum{q,REGDST, [V1CAPINC_I(q)*w1capinc_i(q) + 100*d_addreturn_i(q)] + V1LNDINC_I(q)*w1lndinc_i(q) + V1OCTINC_I(q)*w1octinc_i(q)}; Distribution of the income from the markup on export sales (E_w1ncapinc)

It is assumed that the additional return on export sales is distributed to the owners of capital in the same way as the capital income from domestic sales, which was described in chapter 6.

The additional return is added to equation E_w1ncapinc to feed into capital income net of depreciation and any federal and state taxes on the use of capital in production (the coefficient V1NCAPINC and the variable w1ncapinc).

The additional return also feeds through into any federal and regional taxes on the use of that capital in production (the coefficients V1CAPTXF and V1CAPTXS, and the variables d_w1captxf and d_w1captxs).

In level terms, the level of after-tax capital income net of depreciation becomes:

V1NCAPINC(i,q) = [1 - DEPR(i)]*V1CAP(i,q) + ADDRETURN(i,q) - V1CAPTXF(i,q) - V1CAPTXS(i,q) The percentage change in net after-tax capital income net of depreciation is:

ID01[V1NCAPINC(i,q)]*w1ncapinc(i,q) = [1 - DEPR(i)]*V1CAP(i,q)*(p1cap(i,q) + x1cap(i,q)) + 100*d_addreturn(i,q) - 100*(d_w1captxF(i,q) + d_w1captxS(i,q))

Capital income net of depreciation and production taxes is distributed to the owners of non-labour primary factors according to their relevant factor ownership shares. The existing equations handle this and do not need to be updated to accommodate the additional return. This means that the additional return flowing to:

 foreign investors is determined on the basis of the foreign ownership share of the Australian capital stock (the coefficient FORSHR, which is defined as 1 – the domestic ownership share, the coefficient DOMSHR);

 Australian households is determined on the basis of the domestic ownership share (the coefficient DOMSHR); and

 Australian households in each region is determined on the basis of domestic ownership share (the coefficient DOMSHR) multiplied by the local ownership share (the coefficient LOCSHR).52

These ownership shares vary by industry and state.

It is assumed that DOMSHR and LOCSHR are the same as they are for domestic sales. The additional return to export sales ultimately feed through to:

 regional household non-labour income through equation E_whinc_120 (along with the after production-tax income flows arising from the ownership of capital, land and other costs); and

 foreign owners of the domestic capital stock via the equation E_d_FORCAPINCA.

Equation E_w1ncapinc # Capital income net of depreciation #

(all,i,IND)(all,q,REGDST)

ID01[V1NCAPINC(i,q)]*w1ncapinc(i,q) =

[{1 - DEPR(i)}*V1CAP(i,q)*(p1cap(i,q) + x1cap(i,q)) + 100*d_addreturn(i,q)]

- 100*(d_w1captxF(i,q) + d_w1captxS(i,q));

Effect of the additional return on investment (E_d_r1cap to E_d_r1cap_i)

Given the assumption of static expectations, the additional return to export sales provides producers with an incentive to switch the pattern of existing sales and, through increased investment, to increase output.

The drivers of investment by regional industry in VURM are described in detail in chapter 4. Central to this is the signalling role played by deviations in the rate of return on capital from its long-run trend.

These transmission mechanisms are adapted to accommodate the income stream associated with the additional return on export sales. The additional return on export sales is assumed to feed into the investment decisions of producers by altering the actual rate of return on capital (and, hence, the deviation from its long-run trend that drive investment), as in standard VURM. Gradually, changes in the rate of return on capital and will feed through into the capital stock available for use in production.53

The rate of return on capital in VURM is expressed on an after-tax basis. It is assumed that the additional return on export sales is taxed in the same way as all other non-labour primary factor income at the proportional rate of TGOSINC.54 _{This makes the after-tax additional return from export} sales by industry and region [1 – TGOSINC]*ADDRETURN(i,q).

52 _{For most commodities, the local ownership share used in VURM is effectively the regional share of national} population. The share of Australian non-labour primary factor income flowing to households in other states is 1 - LOCSHR.

53 _{As described in chapter 2 and 3, investment behaviour in VURM is governed by the assumption of adaptive} expectations, in which changes in the disequilibrium rate of return that drive investment decisions are set equal to the change in the after-tax rate of return to capital.

54 _{The tax rate on capital in VURM is calculated as Taxes on income – enterprises in the GFS database} (VGFSI_132("Federal")) divided by the national total of non-labour primary factor income available for consumption (which is equal to sum{q,REGDST, V1GOSINC_I(q)}). The implied tax rate in 2005-06 is about 0.16 (i.e., 16 per cent).

The change in the after-tax additional return on export sales consists of two parts:  the effect of the existing tax rate on any change in the additional return [1 - TGOSINC]*d_addreturn(i,q); and

 the effect of any change in the tax rate on any pre-existing additional return - ADDRETURN_I(q)*d_tgosinc.

Combining these gives the overall change in the after-tax additional return from export sales: [1 - TGOSINC]*d_addreturn(i,q) - ADDRETURN_I(q)*d_tgosinc

The resulting percentage point change in the after-tax rate of return by industry and region (d_r1cap) arising from the additional return on export sales is:

100*IF[VCAP(i,q) ne 0.0,

[1 - TGOSINC]/VCAP(i,q)*d_addreturn(i,q) - ADDRETURN_I(q)/VCAP_I(q)*d_tgosinc]; This term has been added to equation E_d_r1cap, which was described in chapters 2 and 4 and 3, which determines the percentage point change in the after-tax rate of return by industry and region. Equation E_d_r1cap_i similarly determines the percentage point change in the after-tax rate of return by region.

Equation E_d_r1cap

# Definition of after-tax rates of return to capital by industry & region #

(all,i,IND)(all,q,REGDST)

d_r1cap(i,q) = {1 + IF[VCAP(i,q) ne 0.0,

(-1 + {(1 - TGOSINC)*V1CAPINC(i,q)/VCAP(i,q)})]}* [p1capinc(i,q) - p2tot(i,q)] -

100*IF[VCAP(i,q) ne 0.0, (V1CAPINC(i,q)/VCAP(i,q) - DEPR(i))]*d_tgosinc + 100*IF[VCAP(i,q) ne 0.0,

[1 - TGOSINC]/VCAP(i,q)*d_addreturn(i,q) - ADDRETURN_I(q)/VCAP_I(q)*d_tgosinc];

Equation E_d_r1cap_i # Region-wide after-tax rate of return #

(all,q,REGDST)

d_r1cap_i(q) =

IF(VCAP_I(q) ne 0.0, {[1 - TGOSINC]*V1CAPINC_I(q)/VCAP_I(q)})* [p1capinc_i(q) - p2tot_i(q)] -

100*IF[VCAP_I(q) ne 0.0, {V1CAPINC_I(q)/VCAP_I(q) - DEPR_I(q)}]*

d_tgosinc +

100*IF[VCAP_I(q) ne 0.0,

[1 - TGOSINC]/VCAP_I(q)*d_addreturn_i(q) - ADDRETURN_I(q)/VCAP_I(q)*d_tgosinc];