From IRAP to CBIT: tax distortions and redistributive effects
AbstractThe 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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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 28070.
Date of creation: Aug 2010
Date of revision:
business cycles; tax distortions; micro-simulations models; distributive effects; Italy.;
Other versions of this item:
- Manzo Marco & Monteduro Maria Teresa, 2011. "From IRAP to CBIT: Tax distortions and redistributive effects," wp.comunite 0084, Department of Communication, University of Teramo.
- E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
- H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
This paper has been announced in the following NEP Reports:
- NEP-ACC-2011-01-30 (Accounting & Auditing)
- NEP-ALL-2011-01-30 (All new papers)
- NEP-CMP-2011-01-30 (Computational Economics)
- NEP-MAC-2011-01-30 (Macroeconomics)
- NEP-MIC-2011-01-30 (Microeconomics)
- NEP-PBE-2011-01-30 (Public Economics)
- NEP-PUB-2011-01-30 (Public Finance)
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