Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/97295
Authors: 
Finke, Katharina
Heckemeyer, Jost H.
Spengel, Christoph
Year of Publication: 
2014
Series/Report no.: 
ZEW Discussion Papers 14-033
Abstract: 
In their famous Mirrlees review (2011) on reforming the tax system for the 21st century, the authors put forward the introduction of an allowance for corporate equity regime. In recent years, several countries introduced an ACE regime. The main feature of an ACE regime is that it removes tax distortions on marginal investment and finance distortions. Yet, by narrowing the tax base an ACE regime potentially requires an increase in tax rates which might affect location choices and profit shifting activity negatively. In this paper, we employ a microsimulation model to determine the consequences of introducing an ACE regime in Germany. The simulation results show that granting an ACE for corporate income tax purposes results in a revenue loss of about 18%. This could be financed by an increase of the combined profit tax rate by 6 percentage points. At firm level, our analysis illustrates the heterogeneous distribution of the reform effect accross the sample. For 50% of firms between the 25th and 75th percentile, introducing an ACE regime reduces tax payments between 35% and 2%. If the ACE is combined with a tax rate adjustment, the tax effect ranges between -32% and +7.1% for firms between the 25th and 75th percentile. With respect to behavioural responses on decision margins, we find that introducing the ACE reduces the mean debt-ratio by about 1.5 percentage points in the short run. For the capital-stock we arrive at a mean short-term increase of 2.4%. Finally, our computations show that the ACE regime with adjusted profit tax rate cannot be overall tax neutral. In particular, the increase in the profit tax rate required to finance the equity allowance induces intensified outward profit-shifting activities and affects location choices negatively. In the short-run the tax revenue is therefore shown to decline to about 95% of its original level.
Subjects: 
Tax Reform
Allowance for Corporate Equity
Microsimulation
Tax Policy Evaluation
JEL: 
H25
H32
K34
Document Type: 
Working Paper

Files in This Item:
File
Size
393.87 kB





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.