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Corporate taxation when firms are heterogeneous: ACE versus CBIT

Author

Listed:
  • Philipp J. H. Schröder

    (Aarhus University)

  • Allan Sørensen

    (Aarhus University)

Abstract

This paper compares the Allowance for Corporate Equity (ACE) tax and the Comprehensive Business Income Tax (CBIT) in a general equilibrium model with firms that face entry costs, fixed production costs and increasing marginal costs. We add the empirical regularity of heterogeneity (productivity and size) among firms and thus capture selection effects based on firm profitability. Corporate taxation affects selection and consequently the industry structure. An ACE tax distorts the industry structure by permitting the survival of less productive firms. In contrast, a CBIT is neutral on selection. Aggregate real income increases for an equal yield switch from ACE to CBIT. Yet, this switch hurts small low-productivity firms, while it boosts the earnings of large high-productivity firms.

Suggested Citation

  • 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.
    • Handle: RePEc:kap:itaxpf:v:30:y:2023:i:2:d:10.1007_s10797-021-09714-w
    DOI: 10.1007/s10797-021-09714-w
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    More about this item

    Keywords

    Corporate taxation; Corporate tax reform; Heterogeneous firms; Selection; Industry dynamics; Debt bias; Corporate debt tax shield; Allowance for Corporate Equity (ACE); Comprehensive Business Income Tax (CBIT);
    All these keywords.

    JEL classification:

    • D41 - Microeconomics - - Market Structure, Pricing, and Design - - - Perfect Competition
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General

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