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Implementing corporate tax cuts at the expense of neutrality? A legal and optimisation analysis of fundamental reform in practice

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  • Kayis-Kumar, Ann

Abstract

Governments and policy-makers are increasingly faced with the trade-off of protecting their tax revenue bases while maintaining their international competitiveness. This is exemplified by the international trend of jurisdictions reducing their headline corporate tax rates, which is often justified on the basis that these cuts will lead to improved efficiency and integrity outcomes. This article explores whether it is more efficient to implement corporate tax cuts or an alternative reform such as an economic rent tax which may better achieve the tax policy goals of efficiency and integrity. In doing so, this article bridges the gap between applied legal research, economic theory and practical optimisation modelling. Specifically, this research presents a simulation analysis of the behavioural responses of a tax-minimising multinational enterprise to both existing and proposed tax regimes and compares efficiency and integrity outcomes upon implementing corporate tax cuts. This is complemented by a legal comparative analysis featuring case studies of an economic rent tax; namely, the Allowance for Corporate Equity (ACE) as introduced in Belgium and Italy. These case studies will focus on the political hurdles to implementing and sustaining these reforms, which will highlight key lessons learnt from the implementation of the ACE in practice.

Suggested Citation

  • Kayis-Kumar, Ann, 2018. "Implementing corporate tax cuts at the expense of neutrality? A legal and optimisation analysis of fundamental reform in practice," MPRA Paper 89703, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:89703
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    References listed on IDEAS

    as
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    2. Ganghof, Steffen, 2006. "The politics of tax structure," MPIfG Working Paper 06/1, Max Planck Institute for the Study of Societies.
    3. Boadway, Robin & Bruce, Neil, 1984. "A general proposition on the design of a neutral business tax," Journal of Public Economics, Elsevier, vol. 24(2), pages 231-239, July.
    4. Daniela Federici & Valentino Parisi, 2012. "Corporate Taxation and Exports," Working Papers 2012-01, Universita' di Cassino, Dipartimento di Scienze Economiche.
    5. Paolo Panteghini & Maria Laura Parisi & Francesca Pighetti, 2012. "Italy's ACE Tax and its Effect on a Firm's Leverage," CESifo Working Paper Series 3869, CESifo Group Munich.
    6. Kayis-Kumar, Ann, 2016. "International tax planning by multinationals: Simulating a tax-minimising intercompany response to the OECD's recommendation on BEPS Action 4," MPRA Paper 72828, University Library of Munich, Germany.
    7. 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.
    8. Ruud de Mooij & Michael P. Devereux, 2008. "Alternative Systems of Business Tax in Europe: An applied analysis of ACE and CBIT Reforms," Taxation Studies 0023, Directorate General Taxation and Customs Union, European Commission.
    9. Marta Božina Beroš & Marin Beroš, 2013. "Fairness through regulation? Reflections on a cosmopolitan approach to global finance," The Journal of Philosophical Economics, Bucharest Academy of Economic Studies, The Journal of Philosophical Economics, vol. 7(1), November.
    10. 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.
    11. Filippo Oropallo & Valentino Parisi, 2007. "Will Italy’s Tax Reform Reduce the Corporate Tax Burden? A Microsimulation Analysis," Rivista di statistica ufficiale, ISTAT - Italian National Institute of Statistics - (Rome, ITALY), vol. 9(1), pages 31-58, march.
    12. David Weisbach, 2014. "The use of neutralities in international tax policy," Working Papers 1414, Oxford University Centre for Business Taxation.
    13. Ernesto Zangari, 2014. "Addressing the Debt Bias: A Comparison between the Belgian and the Italian ACE Systems," Taxation Papers 44, Directorate General Taxation and Customs Union, European Commission.
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    15. Bonds, Stephen R. & Devereux, Michael P., 1995. "On the design of a neutral business tax under uncertainty," Journal of Public Economics, Elsevier, vol. 58(1), pages 57-71, September.
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    17. 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.
    18. Kayis-Kumar, Ann, 2016. "What's BEPS got to do with it? Exploring the effectiveness of thin capitalisation rules," MPRA Paper 75741, University Library of Munich, Germany.
    19. Philip Du Caju & François Rycx & Ilan Tojerow, 2012. "Wage structure effects of international trade in a small open economy: the case of Belgium," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 148(2), pages 297-331, June.
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    More about this item

    Keywords

    Tax neutrality; Corporate tax reform; Allowance for Corporate Equity;

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • K34 - Law and Economics - - Other Substantive Areas of Law - - - Tax Law

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