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Alternative Systems of Business Tax in Europe: An applied analysis of ACE and CBIT Reforms

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  • Ruud de Mooij

    ()
    (CPB Netherlands)

  • Michael P. Devereux

    ()
    (Oxford University Centre for Business Taxation)

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    Abstract

    This paper explores the economic implications of an allowance for corporate equity (ACE), a comprehensive business income tax (CBIT) and a combination of the two in the EU. We illustrate the key trade-offs in designing ACE and CBIT in the presence of tax distortions at various decision margins of firms, such as its financial structure, investment, profit allocation and discrete location. Using an applied general equilibrium model for Europe, we quantitatively assess the effects of ACE, CBIT and combined reforms in EU countries. The results suggest that ACE is welfare improving as long as corporate tax rates are not used to cover the cost of base narrowing. CBIT typically reduces welfare by exacerbating marginal investment distortions. When governments adjust statutory corporate tax rates to balance their budget, however, CBIT reforms become more attractive while ACE reforms are welfare reducing in a number of countries. European coordination of reforms mitigates fiscal spillovers within the EU and renders ACE reforms more, and CBIT reforms less, attractive for welfare. A combination of ACE and CBIT reforms can be designed to be revenue neutral and welfare improving through smaller financial distortions.

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    File URL: http://ec.europa.eu/taxation_customs/resources/documents/taxation/gen_info/economic_analysis/tax_papers/taxation_paper_17_en.pdf
    File Function: final version, 2009
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    Bibliographic Info

    Paper provided by Directorate General Taxation and Customs Union, European Commission in its series Taxation Papers with number 17.

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    Length: 155 pages
    Date of creation: May 2009
    Date of revision:
    Handle: RePEc:tax:taxpap:0017

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    Web page: http://ec.europa.eu/taxation_customs/index_en.htm
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    Keywords: European Union; corporate taxation;

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    References

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    1. Johannes Becker & Clemens Fuest, 2009. "Optimal tax policy when firms are internationallly mobile," Working Papers, Oxford University Centre for Business Taxation 0907, Oxford University Centre for Business Taxation.
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    3. Alexander Klemm, 2006. "Allowances for Corporate Equity in Practice," IMF Working Papers 06/259, International Monetary Fund.
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    Citations

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    Cited by:
    1. Thomas Hemmelgarn & Gaetan Nicodeme, 2010. "The 2008 Financial Crisis and Taxation Policy," Taxation Papers, Directorate General Taxation and Customs Union, European Commission 20, Directorate General Taxation and Customs Union, European Commission.
    2. European Commission, 2010. "Tax Policy after the Crisis: Monitoring Tax Revenues and Tax Reforms in EU Member States 2010 Report," Taxation Papers, Directorate General Taxation and Customs Union, European Commission 24, Directorate General Taxation and Customs Union, European Commission.
    3. Lourdes Jerez Barroso, 2011. "Base imponible y neutralidad del Impuesto de Sociedades: alternativas y experiencias," Hacienda Pública Española, IEF, IEF, vol. 197(2), pages 113-146, June.
    4. Bernardi, Luigi, 2009. "Le tasse in Europa dagli anni novanta
      [Taxation in Europe since the Years 1990s]
      ," MPRA Paper 23441, University Library of Munich, Germany.
    5. Ruud Mooij & Michael Devereux, 2011. "An applied analysis of ACE and CBIT reforms in the EU," International Tax and Public Finance, Springer, Springer, vol. 18(1), pages 93-120, February.
    6. European Commission, 2011. "Tax Reforms in EU Member States 2011: tax policy challenges for economic growth and fiscal sustainability," Taxation Papers, Directorate General Taxation and Customs Union, European Commission 28, Directorate General Taxation and Customs Union, European Commission.
    7. Luigi, Bernardi, 2011. "Economic crisis and taxation in Europe," MPRA Paper 31007, University Library of Munich, Germany.
    8. Serena Fatica & Thomas Hemmelgarn & Gaetan Nicodeme, 2013. "The Debt-Equity Tax Bias: Consequences and Solutions," Reflets et perspectives de la vie économique, De Boeck Université, De Boeck Université, vol. 0(1), pages 5-18.
    9. Radulescu, Doina & Stimmelmayr, Michael, 2010. "The impact of the 2008 German corporate tax reform: A dynamic CGE analysis," Economic Modelling, Elsevier, vol. 27(1), pages 454-467, January.

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