Assessing the Impact of Introducing an ACE Regime - A Behavioural Corporate Microsimulation Analysis for Germany

24 Pages Posted: 24 Jun 2014

See all articles by Katharina Finke

Katharina Finke

University of Mannheim - Accounting and Taxation

Jost Heckemeyer

University of Mannheim - School of Business Administration (BWL)

Christoph Spengel

Centre for European Economic Research (ZEW)

Date Written: May 15, 2014

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.

Keywords: Tax Reform, Allowance for Corporate Equity, Microsimulation, Tax Policy Evaluation

JEL Classification: H25, H32, K34

Suggested Citation

Finke, Katharina and Heckemeyer, Jost and Spengel, Christoph, Assessing the Impact of Introducing an ACE Regime - A Behavioural Corporate Microsimulation Analysis for Germany (May 15, 2014). ZEW - Centre for European Economic Research Discussion Paper No. 14-033, Available at SSRN: https://ssrn.com/abstract=2457793 or http://dx.doi.org/10.2139/ssrn.2457793

Katharina Finke (Contact Author)

University of Mannheim - Accounting and Taxation ( email )

Mannheim, 68131
Germany

Jost Heckemeyer

University of Mannheim - School of Business Administration (BWL) ( email )

40, Boulevard du Pont-d'Arve
Case Postale 3
1211 Geneva
Germany

Christoph Spengel

Centre for European Economic Research (ZEW) ( email )

D-68161 Mannheim
Germany

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