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Capital Taxation and Imperfect Competition: ACE vs. CBIT

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  • Schindler, Dirk
  • Brekke, Kurt
  • Pires, Armando
  • Schjelderup, Guttorm

Abstract

This paper sets up an imperfect-competition model of a small open economy, and undertakes a welfare comparison of the Corporate Business Income Tax (CBIT) and the Allowance for Corporate Equity tax (ACE). A main result is that a small open economy should levy a positive source tax on capital in a market with free firm entry. Our analysis also shows that the well known neutrality property of the ACE tax is no longer true when firms are mobile and can enter the market. Which tax system is better from a welfare point of view, CBIT or ACE, is shown to depend on assumptions about production technology and entry.

Suggested Citation

  • Schindler, Dirk & Brekke, Kurt & Pires, Armando & Schjelderup, Guttorm, 2014. "Capital Taxation and Imperfect Competition: ACE vs. CBIT," VfS Annual Conference 2014 (Hamburg): Evidence-based Economic Policy 100486, Verein für Socialpolitik / German Economic Association.
    • Handle: RePEc:zbw:vfsc14:100486
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    Cited by:

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    2. Gresik, Thomas A., 2016. "Allowing firms to choose between separate accounting and formula apportionment taxation," Journal of Public Economics, Elsevier, vol. 138(C), pages 32-42.
    3. Petutschnig, Matthias & Rünger, Silke, 2017. "The effects of a tax allowance for growth and investment: Empirical evidence from a firm-level analysis," arqus Discussion Papers in Quantitative Tax Research 221, arqus - Arbeitskreis Quantitative Steuerlehre.
    4. Kayis-Kumar, Ann, 2015. "Thin capitalisation rules: A second-best solution to the cross-border debt bias?," MPRA Paper 72031, University Library of Munich, Germany.
    5. Alessandro Zeli, 2018. "The impact of ACE on investment: the Italian case," Economia Politica: Journal of Analytical and Institutional Economics, Springer;Fondazione Edison, vol. 35(3), pages 741-762, December.
    6. Avdiu, Besart, 2018. "Optimal capital and labor income taxation in small and developing countries," MPRA Paper 84884, University Library of Munich, Germany.
    7. Mooij Ruud De & Hebous Shafik & Hrdinkova Milena, 2018. "Growth-Enhancing Corporate Tax Reform in Belgium," Nordic Tax Journal, Sciendo, vol. 2018(1), pages 1-17, January.
    8. Bournakis, Ioannis & Mallick, Sushanta, 2018. "TFP estimation at firm level: The fiscal aspect of productivity convergence in the UK," Economic Modelling, Elsevier, vol. 70(C), pages 579-590.
    9. Philipp J. H. Schröder & Allan Sørensen, 2023. "Corporate taxation when firms are heterogeneous: ACE versus CBIT," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 30(2), pages 396-418, April.

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    More about this item

    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm

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