Investment Decisions and Tax Revenues Under an Allowance for Corporate Equity
30 Pages Posted: 26 Sep 2002
Date Written: July 15, 2002
In recent years, some European countries have relied on elements of an allowance for corporate equity (ACE) in the design of their tax systems. We analyse the effects of ACE-based taxation on rates of return and effective tax rates. Investment neutrality is lost if the imputed interest rate deviates from the market interest rate. With increasing profitability, the relative importance of the ACE compared with the statutory tax rate decreases. This might induce disadvantages for countries that compete for profitable, multinational companies. Revenue effects indicate that tax rates under an ACE-based tax system should not exceed those in competing countries by much.
Keywords: Allowance for Corporate Equity, Corporate Taxation, Effective Tax Rates, Tax Revenues
JEL Classification: H25, H21
Suggested Citation: Suggested Citation