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ACE vs. CBIT: Which is Better for Investment and Welfare?

  • Doina Maria Radulescu
  • Michael Stimmelmayr

This paper analyses the switch to an ACE or to a CBIT type of tax system starting from the present German tax system. We show that in case an ACE type of reform is financed by an increase in the VAT and not in the profit tax, it might be preferred to a CBIT even in the context of an open economy. Moreover, the required exogenous increase in the profit tax rate cannot ensure revenue neutrality on its own due to the negative general equilibrium effects it triggers on the whole economy. For a CBIT, the exogenous reduction in the tax rates on corporate and non-corporate profits leads to better results than when we allow for an endogenous change in the VAT. The best results arise when the CBIT is accompanied by a provision for immediate write-off and a lower profit tax or when the ACE with no additional capital gains taxation on the household side is financed by an increase in the VAT.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2006/wp-cesifo-2006-11/cesifo1_wp1850.pdf
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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 1850.

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Date of creation: 2006
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Handle: RePEc:ces:ceswps:_1850
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  1. Hans-Werner Sinn, 1991. "Taxation and the Cost of Capital: The "Old" View, the "New" View, and Another View," NBER Chapters, in: Tax Policy and the Economy, Volume 5, pages 25-54 National Bureau of Economic Research, Inc.
  2. Christian Keuschnigg, 1991. "The Transition to a Cash Flow Income Tax," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 127(II), pages 113-140, June.
  3. Sinn, Hans-Werner, 1991. "The vanishing harberger triangle," Journal of Public Economics, Elsevier, vol. 45(3), pages 271-300, August.
  4. Bradford, David F., 1981. "The incidence and allocation effects of a tax on corporate distributions," Journal of Public Economics, Elsevier, vol. 15(1), pages 1-22, February.
  5. Zodrow, George R., 1991. "On the 'Traditional' and 'New' Views of Dividend Taxation," National Tax Journal, National Tax Association, vol. 44(4), pages 497-509, December.
  6. Bond, Stephen R. & Devereux, Michael P., 2003. "Generalised R-based and S-based taxes under uncertainty," Journal of Public Economics, Elsevier, vol. 87(5-6), pages 1291-1311, May.
  7. Martin D. Dietz & Christian Keuschnigg, 2005. "A Growth Oriented Dual Income Tax," CESifo Working Paper Series 1513, CESifo Group Munich.
  8. John Isaac, 1997. "A comment on the viability of the allowance for corporate equity," Fiscal Studies, Institute for Fiscal Studies, vol. 18(3), pages 303-318, August.
  9. Sorensen, Peter Birch, 1995. "Changing Views of the Corporate Income Tax," National Tax Journal, National Tax Association, vol. 48(2), pages 279-94, June.
  10. Michael Devereux & Harold Freeman, 1991. "A general neutral profits tax," Fiscal Studies, Institute for Fiscal Studies, vol. 12(3), pages 1-15, August.
  11. Fehr, Hans, 1999. "Welfare Effects of Dynamic Tax Reforms," Beiträge zur Finanzwissenschaft, Mohr Siebeck, Tübingen, edition 1, volume 5, number urn:isbn:9783161470165, Abril.
  12. Auerbach, Alan J, 1979. "Wealth Maximization and the Cost of Capital," The Quarterly Journal of Economics, MIT Press, vol. 93(3), pages 433-46, August.
  13. Michael Keen & John King, 2002. "The Croatian profit tax: an ACE in practice," Fiscal Studies, Institute for Fiscal Studies, vol. 23(3), pages 401-418, September.
  14. Lammersen, Lothar, 2002. "Investment Decisions and Tax Revenues Under an Allowance for Corporate Equity," ZEW Discussion Papers 02-47, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  15. Sinn, H.W., 1990. "Taxation And The Cost Of Capital: The "Old" View, And Another View," Papers 59, Princeton, Woodrow Wilson School - Discussion Paper.
  16. Robin Boadway & Neil Bruce, 1982. "A General Proposition on the Design of a Neutral Business Tax," Working Papers 461, Queen's University, Department of Economics.
  17. Alan J. Auerbach & Kevin A. Hassett, 2000. "On the Marginal Source of Investment Funds," NBER Working Papers 7821, National Bureau of Economic Research, Inc.
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