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The Incidence of an Extended Ace Corporation Tax

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  • Ernst Fehr
  • Wolfgang Wiegard

Abstract

This paper deals with the efficiency and distributional consequences of a switch from the current German income and corporate tax system to one special variant of an intertemporally neutral tax, an extended ACE (allowance for corporate equity) corporation tax. This tax is favoured by the IFS Capital Taxes Group and was implemented in Croatia in 1994. We not only calculate the welfare consequences of introducing the ACE, but also separate the efficiency effects from intragenerational as well as intergenerational redistribution. The quantitative analysis is based on a dynamic simulation model of the Auerbach-Kotlikoff type which distinguishes between five income classes within each generation. The numerical results indicate that such a fundamental tax reform could yield enormous efficiency gains without necessarily increasing income inequality.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2001/wp-cesifo-2001-05/cesifo_wp484.pdf
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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 484.

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Date of creation: 2001
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Handle: RePEc:ces:ceswps:_484

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Related research

Keywords: Corporate taxation; intra- and intergenerational incidence; dynamic CGE modeling;

References

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  1. Hans-Werner Sinn, 1991. "Taxation and the Cost of Capital: The "Old" View, the "New" View, and Another View," NBER Chapters, in: Tax Policy and the Economy, Volume 5, pages 25-54 National Bureau of Economic Research, Inc.
  2. Andrew Abel & Gregory N. Mankiw & Lawrence H. Summers & Richard Zeckhauser, . "Assessing Dynamic Efficiency: Theory and Evidence," Rodney L. White Center for Financial Research Working Papers, Wharton School Rodney L. White Center for Financial Research 14-88, Wharton School Rodney L. White Center for Financial Research.
  3. Homburg, Stefan, 1992. "Efficient Economic Growth," EconStor Books, ZBW - German National Library of Economics, number 92903, April.
  4. Bond, Stephen R & Devereux, Michael P & Gammie, Malcolm J, 1996. "Tax Reform to Promote Investment," Oxford Review of Economic Policy, Oxford University Press, Oxford University Press, vol. 12(2), pages 109-17, Summer.
  5. David Altig & Alan J. Auerbach & Laurence J. Kotlikoff & Kent A. Smetters & Jan Walliser, 1997. "Simulating U.S. tax reform," Working Paper 9712, Federal Reserve Bank of Cleveland.
  6. Kanniainen, Vesa & Sodersten, Jan, 1995. "The importance of reporting conventions for the theory of corporate taxation," Journal of Public Economics, Elsevier, Elsevier, vol. 57(3), pages 417-430, July.
  7. Boadway, Robin & Bruce, Neil, 1984. "A general proposition on the design of a neutral business tax," Journal of Public Economics, Elsevier, Elsevier, vol. 24(2), pages 231-239, July.
  8. Hayashi, Fumio, 1982. "Tobin's Marginal q and Average q: A Neoclassical Interpretation," Econometrica, Econometric Society, Econometric Society, vol. 50(1), pages 213-24, January.
  9. Boadway, R. W. & Bruce, N., 1979. "Depreciation and interest deductions and the effect of the corporation income tax on investment," Journal of Public Economics, Elsevier, Elsevier, vol. 11(1), pages 93-105, February.
  10. Kotlikoff, Laurence J & Smetters, Kent A & Walliser, Jan, 1998. "Social Security: Privatization and Progressivity," American Economic Review, American Economic Association, American Economic Association, vol. 88(2), pages 137-41, May.
  11. McLure, Charles E. Jr. & Zodrow, George R., 1998. "The Economic Case For Foreign Tax Credits for Cash Flow Taxes," National Tax Journal, National Tax Association, vol. 51(n. 1), pages 1-22, March.
  12. Fehr, Hans, 1999. "Welfare Effects of Dynamic Tax Reforms," Beiträge zur Finanzwissenschaft, Mohr Siebeck, Tübingen, Mohr Siebeck, Tübingen, edition 1, volume 5, number urn:isbn:9783161470165, July.
  13. Michael Devereux & Harold Freeman, 1991. "A general neutral profits tax," Fiscal Studies, Institute for Fiscal Studies, Institute for Fiscal Studies, vol. 12(3), pages 1-15, August.
  14. Christian Keuschnigg, 1990. "The Transition to a Cash Flow Income Tax," Discussion Paper Serie A, University of Bonn, Germany 276, University of Bonn, Germany.
  15. Hans Fehr & Laurence J. Kotlikoff & Willi Leibfritz, 1999. "Generational Accounting in General Equilibrium," NBER Chapters, in: Generational Accounting around the World, pages 43-72 National Bureau of Economic Research, Inc.
  16. John Isaac, 1997. "A comment on the viability of the allowance for corporate equity," Fiscal Studies, Institute for Fiscal Studies, Institute for Fiscal Studies, vol. 18(3), pages 303-318, August.
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Citations

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Cited by:
  1. Paolo Panteghini, 2005. "S-Based Taxation under Default Risk," CESifo Working Paper Series 1496, CESifo Group Munich.
  2. Feist, Karen & Krimmer, Pascal & Raffelhüschen, Bernd, 2001. "Intergenerative Effekte einer lebenszyklusorientierten Einkommensteuerreform: Die Einfachsteuer des Heidelberger Steuerkreises," Discussion Papers 98, Institut für Finanzwissenschaft, Albert-Ludwigs-Universität Freiburg.
  3. Paolo M. Panteghini, 2005. "Asymmetric Taxation under Incremental and Sequential Investment," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 7(5), pages 761-779, December.
  4. Paolo M. Panteghini, 2001. "Corporate Tax Asymmetries under Investment Irreversibility," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, Mohr Siebeck, Tübingen, vol. 58(3), pages 207-, July.
  5. Krimmer, Pascal & Raffelhüschen, Bernd, 2003. "Intergenerative Umverteilung und Wachstumsimpulse der Steuerreformen 1999 bis 2005: Die Perspektive der Generationenbilanz," Discussion Papers 105, Institut für Finanzwissenschaft, Albert-Ludwigs-Universität Freiburg.

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