An applied analysis of ACE and CBIT reforms in the EU

Ruud A. De Mooij · Michael Devereux

105 citations0/0 files storedInternational Tax and Public Finance

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Corporate Taxation and Avoidance Economic and Fiscal Studies Taxation and Legal Issues

Abstract

We assess the quantitative impact of two reforms to corporation tax, which would eliminate the differential treatment of debt and equity: the allowance for corporate equity (ACE) and the comprehensive business income tax (CBIT). We explore the impact of these reforms on various decision margins, using an applied general equilibrium model for the EU calibrated with recent empirical estimates of elasticities. The results suggest that, if governments adjust statutory corporate tax rates to balance their budget, profit shifting and discrete location render CBIT more attractive for most individual European countries. European coordination makes a joint ACE more, and a joint CBIT less efficient. A combination of ACE and CBIT is always welfare improving.

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References

1997Capital-Market Imperfections and Investment 2002Evaluating Tax Policy for Location Decisions 1996Taxes and the location of production: evidence from a panel of US multinationals 2002Handbook of Public Economics 1998Taxes and the location of production: evidence from a panel of US multinationals 1984A general proposition on the design of a neutral business tax 2008Corporate tax elasticities: a reader's guide to empirical findings 2002Tax Policy and Business Investment**RGH acknowledges financial support from Harvard Business School and the American Enterprise Institute.

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2011Tax Biases to Debt Finance 2021Taxing Profit in a Global Economy 2017Evaluating the effects of ACE systems on multinational debt financing and investment 2012Optimal Monetary and Prudential Policies 2017Corporation taxes in the European Union: Slowly moving toward comprehensive business income taxation?2019Residual Profit Allocation by Income

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