IDEAS home Printed from https://ideas.repec.org/a/kap/rqfnac/v51y2018i4d10.1007_s11156-017-0693-2.html
   My bibliography  Save this article

The effects on investment incentives of an allowance for corporate equity tax system: the Belgian case as an example

Author

Listed:
  • Carmen Bachmann

    (Leipzig University)

  • Martin Baumann

    (Leipzig University)

  • Konrad Richter

    (Leipzig University)

Abstract

In the past years, allowance for corporate equity (ACE) tax systems have become more popular even though they are still quite rare. An ACE tends to make a tax system neutral in respect of whether a company is financed by debt or equity. Less attention is given to the effects on investment incentives by scientific literature. We construct a model based on the principle of a hurdle rate to show whether and how an ACE system could change a company’s decision between distribution and reinvestment. The analysis is extended by implementing the so called fairness tax. We find that the influence of the fairness tax on (re)investment incentives depends on the debt to total capital ratio and the return on equity. Hence, the introduction of an ACE does only in certain cases lead to a change from distribution to reinvestment. Interestingly, the fairness tax can increase the incentive to reinvest in few situations and can make the ACE system more attractive in respect of reinvestment.

Suggested Citation

  • Carmen Bachmann & Martin Baumann & Konrad Richter, 2018. "The effects on investment incentives of an allowance for corporate equity tax system: the Belgian case as an example," Review of Quantitative Finance and Accounting, Springer, vol. 51(4), pages 943-965, November.
    • Handle: RePEc:kap:rqfnac:v:51:y:2018:i:4:d:10.1007_s11156-017-0693-2
    DOI: 10.1007/s11156-017-0693-2
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s11156-017-0693-2
    File Function: Abstract
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1007/s11156-017-0693-2?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Alexander Klemm, 2007. "Allowances for Corporate Equity in Practice," CESifo Economic Studies, CESifo Group, vol. 53(2), pages 229-262, June.
    2. Savina Princen, 2012. "Taxes do Affect Corporate Financing Decisions: The Case of Belgian ACE," CESifo Working Paper Series 3713, CESifo.
    3. (IFS), Institute for Fiscal Studies & Mirrlees, James (ed.), 2011. "Tax By Design: The Mirrlees Review," OUP Catalogue, Oxford University Press, number 9780199553747.
    4. Hebous, Shafik & Ruf, Martin, 2017. "Evaluating the effects of ACE systems on multinational debt financing and investment," Journal of Public Economics, Elsevier, vol. 156(C), pages 131-149.
    5. Devereux, Michael P., 2012. "Issues in the Design of Taxes on Corporate Profit," National Tax Journal, National Tax Association;National Tax Journal, vol. 65(3), pages 709-730, September.
    6. Roger Gordon, 2011. "Commentary on Tax by Design: The Mirrlees Review," Fiscal Studies, Institute for Fiscal Studies, vol. 32(3), pages 395-414, September.
    7. Bond, Stephen R & Devereux, Michael P & Gammie, Malcolm J, 1996. "Tax Reform to Promote Investment," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 12(2), pages 109-117, Summer.
    8. Ruud Mooij & Michael Devereux, 2011. "An applied analysis of ACE and CBIT reforms in the EU," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 18(1), pages 93-120, February.
    9. Paul Johnson & Gareth Myles, 2011. "The Mirrlees Review," Fiscal Studies, Institute for Fiscal Studies, vol. 32(3), pages 319-329, September.
    10. Bonds, Stephen R. & Devereux, Michael P., 1995. "On the design of a neutral business tax under uncertainty," Journal of Public Economics, Elsevier, vol. 58(1), pages 57-71, September.
    11. Robert Couch & Michael Dothan & Wei Wu, 2012. "Interest Tax Shields: A Barrier Options Approach," Review of Quantitative Finance and Accounting, Springer, vol. 39(1), pages 123-146, July.
    12. Carmen Bachmann & Martin Baumann, 2016. "The repatriation incentive of the foreign dividend exemption system," Applied Economics, Taylor & Francis Journals, vol. 48(29), pages 2736-2755, June.
    13. Michael P. Devereux & Rachel Griffith & Alexander Klemm, 2002. "Corporate income tax reforms and international tax competition [‘Do domestic firms benefit from direct foreign investment? Evidence from Venezuela’]," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 17(35), pages 449-495.
    14. aus dem Moore, Nils, 2014. "Taxes and Corporate Financing Decisions – Evidence from the Belgian ACE Reform," Ruhr Economic Papers 533, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
    15. Boadway, Robin & Bruce, Neil, 1984. "A general proposition on the design of a neutral business tax," Journal of Public Economics, Elsevier, vol. 24(2), pages 231-239, July.
    16. Lammersen, Lothar, 2002. "Investment Decisions and Tax Revenues Under an Allowance for Corporate Equity," ZEW Discussion Papers 02-47, ZEW - Leibniz Centre for European Economic Research.
    17. Michael Devereux & Harold Freeman, 1991. "A general neutral profits tax," Fiscal Studies, Institute for Fiscal Studies, vol. 12(3), pages 1-15, August.
    18. Ruud A. De Mooij, 2012. "Tax Biases to Debt Finance: Assessing the Problem, Finding Solutions," Fiscal Studies, Institute for Fiscal Studies, vol. 33(4), pages 489-512, December.
    19. Alessandra Staderini, 2001. "Tax reforms to influence corporate financial policy: the case of the Italian business tax reform of 1997-98," Temi di discussione (Economic working papers) 423, Bank of Italy, Economic Research and International Relations Area.
    20. Joshua S. Bahng (d'Arc) & Hyeong-Chul Jeong, 2012. "Nonlinear Behaviors in Capital Structure Decisions in Australian Firms," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 15(03), pages 1-19.
    21. Bhavish Jugurnath & Mark Stewart & Robert Brooks, 2008. "Dividend taxation and corporate investment: a comparative study between the classical system and imputation system of dividend taxation in the United States and Australia," Review of Quantitative Finance and Accounting, Springer, vol. 31(2), pages 209-224, August.
    22. Michael Overesch & Georg Wamser, 2014. "Bilateral internal debt financing and tax planning of multinational firms," Review of Quantitative Finance and Accounting, Springer, vol. 42(2), pages 191-209, February.
    23. Geert Campenhout & Tom Caneghem, 2013. "How did the notional interest deduction affect Belgian SMEs’ capital structure?," Small Business Economics, Springer, vol. 40(2), pages 351-373, February.
    24. Ming-Chang Cheng & Zuwei-Ching Tzeng, 2014. "Effect of Leverage on Firm Market Value and How Contextual Variables Influence this Relationship," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 17(01), pages 1-63.
    25. Amilcar A. Menichini, 2017. "On the value and determinants of the interest tax shields," Review of Quantitative Finance and Accounting, Springer, vol. 48(3), pages 725-748, April.
    26. Michael Keen & John King, 2002. "The Croatian profit tax: an ACE in practice," Fiscal Studies, Institute for Fiscal Studies, vol. 23(3), pages 401-418, September.
    27. Magnus Talberg & Christian Winge & Stein Frydenberg & Sjur Westgaard, 2008. "Capital Structure Across Industries," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 15(2), pages 181-200.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Rainer Niemann & Mariana Sailer, 2023. "Is analytical tax research alive and kicking? Insights from 2000 until 2022," Journal of Business Economics, Springer, vol. 93(6), pages 1149-1212, August.
    2. Kai Chang & Ning Lu & Ze Sheng Li & Yi Ran Wang, 2021. "The combined impacts of fiscal and credit policies on green firm's investment opportunity: Evidences from Chinese firm‐level analysis," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 42(7), pages 1822-1835, October.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Hebous, Shafik & Ruf, Martin, 2017. "Evaluating the effects of ACE systems on multinational debt financing and investment," Journal of Public Economics, Elsevier, vol. 156(C), pages 131-149.
    2. Petutschnig, Matthias & Rünger, Silke, 2017. "The effects of a tax allowance for growth and investment: Empirical evidence from a firm-level analysis," arqus Discussion Papers in Quantitative Tax Research 221, arqus - Arbeitskreis Quantitative Steuerlehre.
    3. Hebous, Shafik & Ruf, Martin, 2017. "Evaluating the effects of ACE systems on multinational debt financing and investment," Journal of Public Economics, Elsevier, vol. 156(C), pages 131-149.
    4. Finke, Katharina & Heckemeyer, Jost H. & Spengel, Christoph, 2014. "Assessing the impact of introducing an ACE regime: A behavioural corporate microsimulation analysis for Germany," ZEW Discussion Papers 14-033, ZEW - Leibniz Centre for European Economic Research.
    5. Bofinger, Peter & Schnabel, Isabel & Feld, Lars P. & Schmidt, Christoph M. & Wieland, Volker, 2015. "Zukunftsfähigkeit in den Mittelpunkt. Jahresgutachten 2015/16 [Focus on Future Viability. Annual Report 2015/16]," Annual Economic Reports / Jahresgutachten, German Council of Economic Experts / Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung, volume 127, number 201516.
    6. Nils aus dem Moore, 2014. "Taxes and Corporate Financing Decisions – Evidence from the Belgian ACE Reform," Ruhr Economic Papers 0533, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.
    7. repec:zbw:rwirep:0533 is not listed on IDEAS
    8. Kathleen Andries & Martine Cools & Steve Van Uytbergen, 2017. "To Shift or Not To Shift? Intertemporal Income Shifting as a Response to the Risk Capital Allowance Introduction in Belgium," European Accounting Review, Taylor & Francis Journals, vol. 26(3), pages 531-559, July.
    9. aus dem Moore, Nils, 2014. "Taxes and Corporate Financing Decisions – Evidence from the Belgian ACE Reform," Ruhr Economic Papers 533, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
    10. Devereux, Michael P., 2012. "Issues in the Design of Taxes on Corporate Profit," National Tax Journal, National Tax Association;National Tax Journal, vol. 65(3), pages 709-730, September.
    11. Kayis-Kumar, Ann, 2015. "Thin capitalisation rules: A second-best solution to the cross-border debt bias?," MPRA Paper 72031, University Library of Munich, Germany.
    12. Nicola Branzoli & Antonella Caiumi, 2020. "How effective is an incremental ACE in addressing the debt bias? Evidence from corporate tax returns," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 27(6), pages 1485-1519, December.
    13. Schock, Matthias Malte, 2019. "Steuerreformvorschläge des Mirrlees Committee und der Stiftung Marktwirtschaft [Tax Reform Proposals of the Mirrlees Committee and the Stiftung Marktwirtschaft]," MPRA Paper 96689, University Library of Munich, Germany.
    14. Mooij Ruud De & Hebous Shafik & Hrdinkova Milena, 2018. "Growth-Enhancing Corporate Tax Reform in Belgium," Nordic Tax Journal, Sciendo, vol. 2018(1), pages 1-17, January.
    15. Ruf Martin & Schindler Dirk, 2015. "Debt Shifting and Thin-Capitalization Rules – German Experience and Alternative Approaches," Nordic Tax Journal, Sciendo, vol. 2015(1), pages 17-33, September.
    16. Robin Boadway & Motohiro Sato & Jean-Francois Tremblay, 2015. "Cash-flow business taxation revisited: bankruptcy, risk aversion and asymmetric information," Working Papers 1531, Oxford University Centre for Business Taxation.
    17. Ruud de Mooij & Michael P. Devereux, 2008. "Alternative Systems of Business Tax in Europe: An applied analysis of ACE and CBIT Reforms," Taxation Studies 0023, Directorate General Taxation and Customs Union, European Commission.
    18. Meki, Muhammad, 2023. "Levelling the debt–equity playing field: Evidence from Belgium," European Economic Review, Elsevier, vol. 151(C).
    19. Shafik Hebous & Alexander Klemm, 2020. "A destination-based allowance for corporate equity," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 27(3), pages 753-777, June.
    20. Pablo Gutierrez & Ramon E. Lopez & Eugenio Figueroa, 2014. "Local neutrality of Corporate Tax systems," Working Papers wp394, University of Chile, Department of Economics.
    21. Cao, Yifei & Whyte, Kemar, 2022. "Corporate Tax Shields and Capital Structure: Levelling the Playing Field in Debt vs Equity Finance," National Institute of Economic and Social Research (NIESR) Discussion Papers 542, National Institute of Economic and Social Research.

    More about this item

    Keywords

    Allowance for corporate equity; Notional interest deduction; Reinvestment incentive; Fairness tax;
    All these keywords.

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:kap:rqfnac:v:51:y:2018:i:4:d:10.1007_s11156-017-0693-2. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.