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How effective is an incremental ACE in addressing the debt bias? Evidence from corporate tax returns

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  • Nicola Branzoli

    (Bank of Italy)

  • Antonella Caiumi

    (National Institute of Statistics)

Abstract

The Allowance for Corporate Equity (ACE) introduced in Italy in 2011 has decreased the fiscal distortion between the costs of equity and debt by introducing the deductibility from taxable income of a notional return on capital increases. In this paper, we estimate the impact of the ACE on the leverage ratio of Italian manufacturing firms. Using a novel instrumental variable approach to identify the causal effect, we find that the introduction of the incremental ACE has substantially reduced the leverage ratio of its beneficiaries. We find that the effect is larger for smaller enterprises and for mature firms. In addition, the impact of the ACE is higher for vulnerable and risky firms than for sound firms. These results suggest that an incremental ACE may be an effective policy tool to reduce the leverage ratio of European firms.

Suggested Citation

  • Nicola Branzoli & Antonella Caiumi, 2020. "How effective is an incremental ACE in addressing the debt bias? Evidence from corporate tax returns," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 27(6), pages 1485-1519, December.
    • Handle: RePEc:kap:itaxpf:v:27:y:2020:i:6:d:10.1007_s10797-020-09609-2
    DOI: 10.1007/s10797-020-09609-2
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    Cited by:

    1. Shafik Hebous & Alexander Klemm, 2020. "A destination-based allowance for corporate equity," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 27(3), pages 753-777, June.
    2. Susanne Maidorn & Lukas Reiss, 2021. "Treffsicherheit der Maßnahmen zur Stützung der Haushaltseinkommen während der COVID-19-Krise in Österreich," Monetary Policy & the Economy, Oesterreichische Nationalbank (Austrian Central Bank), issue Q3/21, pages 1-15.
    3. Antonio De Socio & Enrico Sette, 2018. "Firms’ investments during two crises," Temi di discussione (Economic working papers) 1173, Bank of Italy, Economic Research and International Relations Area.
    4. European Commission, 2018. "Tax Policies in the European Union: 2018 Survey," Taxation Survey 2018, Directorate General Taxation and Customs Union, European Commission.
    5. European Commission, 2019. "Tax Policies in the European Union: 2020 Survey," Taxation Survey 2020, Directorate General Taxation and Customs Union, European Commission.

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    More about this item

    Keywords

    Allowance for Corporate Equity; Corporate leverage; Debt–equity bias;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm

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