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Allowances for Corporate Equity in Practice

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  • Alexander Klemm

Abstract

This paper provides an overview of full and partial allowance for corporate equity (ACE) tax systems in practice. In the recent past, ACE systems have been used in Austria, Croatia, and Italy. Brazil still applies a variant of such a system and Belgium introduced one this year. This paper summarizes the empirical literature on past ACE systems, and provides a theoretical and empirical assessment of the Brazilian ACE variant. The main finding is that the Brazilian reform introduced an ACE system for a minority of firms only, with the majority instead having a system of dividend deductibility. Despite the reduction in the tax preference for debt finance, capital structures have not changed much, but dividends have increased. Investment appears to have benefited from the reform, although the extent to which this was due to the new structure rather than the tax cut is unclear.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 06/259.

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Length: 33
Date of creation: 01 Nov 2006
Date of revision:
Handle: RePEc:imf:imfwpa:06/259

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Keywords: Tax systems; Tax reforms; Income taxes; Profits; tax system; tax rates; tax reform; effective tax rates; taxation; corporate income tax; personal taxes; income tax system; capital stock; capital structure; tax payments; tax base; fiscal studies; dividend payments; tax revenues; personal income tax; average tax rate; international tax; personal income tax system; marginal tax rates; tax purposes; personal income taxes; public finance; tax cut; taxable profits; tax competition; business income tax; tax deductible; fiscal reference; corporate income taxes; tax changes; tax profits; marginal tax rate; capital taxes; business taxation; tax deduction; tax policy; national tax journal; tax credit; tax on capital; tax advantages; international tax competition; interest taxation; tax reform process; fiscal affairs; tax ? journal; corporate income taxation; lower tax rates; corporate tax base; tax burden; increases in tax rates; capital gains tax; tax harmonization; corporation tax; tax free dividends; tax journal; dividend taxation; optimal taxation; fiscal affairs department;

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References

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  1. Steve Bond & Michael Devereux & Alexander Klemm, 2005. "Dissecting dividend decisions: some clues about the effects of dividend taxation from recent UK reforms," IFS Working Papers W05/17, Institute for Fiscal Studies.
  2. Devereux, Michael P. & Griffith, Rachel, 1998. "Taxes and the location of production: evidence from a panel of US multinationals," Journal of Public Economics, Elsevier, vol. 68(3), pages 335-367, June.
  3. Blundell, Richard & Bond, Stephen & Devereux, Michael & Schiantarelli, Fabio, 1992. "Investment and Tobin's Q: Evidence from company panel data," Journal of Econometrics, Elsevier, vol. 51(1-2), pages 233-257.
  4. Robin Boadway & Neil Bruce, 1982. "A General Proposition on the Design of a Neutral Business Tax," Working Papers 461, Queen's University, Department of Economics.
  5. Efraim Sadka, 1991. "An Inflation-Proof Tax System?: Some Lessons from Israel," IMF Staff Papers, Palgrave Macmillan, vol. 38(1), pages 135-155, March.
  6. 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.
  7. Michael Devereux & Harold Freeman, 1991. "A general neutral profits tax," Fiscal Studies, Institute for Fiscal Studies, vol. 12(3), pages 1-15, August.
  8. Fane, G., 1987. "Neutral taxation under uncertainty," Journal of Public Economics, Elsevier, vol. 33(1), pages 95-105, June.
  9. John Isaac, 1997. "A comment on the viability of the allowance for corporate equity," Fiscal Studies, Institute for Fiscal Studies, vol. 18(3), pages 303-318, August.
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