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From IRAP to CBIT: tax distortions and redistributive effects

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  • Manzo, Marco
  • Monteduro, Maria Teresa

Abstract

The paper explores the differences between IRAP (the Regional Tax on Productive Activities) and CBIT (the Comprehensive Business Income Tax), which approximately corresponds to allow the deduction of labor cost from the taxable base of IRAP. By developing a DSGE model that ncorporates business taxes, like IRAP or CBIT, we find that tax distortions due to IRAP are more contractionary than those caused by the presence of CBIT. Empirically, tax revenues and redistributive effects are more carefully analyzed. We implement a microsimulation model (MSM) based on a dataset of more than 150,000 incorporated firms. We show that small incorporated firms are particularly harmed by IRAP, especially when business run a loss instead of a profit. This is due to the fact that IRAP is a business tax on value added, which does not allow for the deduction of labor cost. For this purpose, we focus on the introduction of a reform based on the CBIT principle. Our result is that CBIT is particularly costly and more able to enhance the profitability for larger enterprises. Moreover, the tax design of CBIT is more regressive compared to the IRAP including tax allowances. Consequently, an efficiency-equity trade-off between IRAP and CBIT might be emphasized

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 28070.

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Date of creation: Aug 2010
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Handle: RePEc:pra:mprapa:28070

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Keywords: business cycles; tax distortions; micro-simulations models; distributive effects; Italy.;

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  10. Bretschger, Lucas & Hettich, Frank, 2000. "Globalisation, capital mobility and tax competition: Theory and evidence for OECD countries," Wirtschaftswissenschaftliche Diskussionspapiere, Ernst Moritz Arndt University of Greifswald, Faculty of Law and Economics 07/2000, Ernst Moritz Arndt University of Greifswald, Faculty of Law and Economics.
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