Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/105086
Authors: 
Brekke, Kurt R.
Garcia-Pires, Armando J.
Schindler, Dirk
Schjelderup, Guttorm
Year of Publication: 
2014
Series/Report no.: 
CESifo Working Paper 5075
Abstract: 
This paper studies the market and welfare effects of two main tax reforms - the Corporate Business Income Tax (CBIT) and the Allowance for Corporate Equity tax (ACE). Using an imperfect-competition model for a small open economy, it is shown that the well-known neutrality property of ACE does not hold. Both corporate tax regimes distort market entry and equilibrium prices. A main result is that a small open economy should levy a positive source tax on capital in markets with free firm entry. Which tax system is better from a welfare point of view, depends on production technology, the competitive effects of ACE and CBIT, and whether entry is excessive or suboptimal at the given corporate tax rate. Imposing tax income neutrality yields a higher corporate tax rate with ACE, which increases the scope for CBIT to be welfare improving.
Subjects: 
optimal corporate taxation
corporate tax reform
imperfect competition
ACE
CBIT
JEL: 
D43
H25
Document Type: 
Working Paper

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