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Corporate tax reform in Italy: the effects on firms' financial preferences and real choices

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  • Ernesto Zangari

Abstract

In this paper I analyze the "tax rate cuts 'cum' base broadening" corporate tax reform enacted with the 2008 Italian budget bill. First of all, I show that the reform does not change the financial preferences of companies: debt continues to be the preferred source of funding. More importantly, I argue that the reform has increased the fiscal asymmetry between debt and equity. Secondly, despite of the tax rate cuts, I show that the reform has increased the cost of capital, especially in the case of equity financing. Thirdly, I argue that the new restrictive depreciation rules will eliminate the tax distortions across assets, but - by increasing the extra-cost of equity financing - they will also penalize firms, especially "credit rationed" ones. Finally, from the cost of capital increase, I infer that the reform will affect differently investment projects with different rates of return: the tax burden will rise for low profitable investments and it will decrease for high profitable ones.

Suggested Citation

  • Ernesto Zangari, 2009. "Corporate tax reform in Italy: the effects on firms' financial preferences and real choices," Politica economica, Società editrice il Mulino, issue 2, pages 147-184.
  • Handle: RePEc:mul:je8794:doi:10.1429/30315:y:2009:i:2:p:147-184
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