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

Author

Listed:
  • Branzoli Nicola
  • Caiumi Antonella

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. The effect of the reform increases with age and decreases with the size of the enterprise. These results suggest that an incremental ACE may be an effective policy tool to reduce the leverage ratio of European firms

Suggested Citation

  • Branzoli Nicola & Caiumi Antonella, 2018. "How effective is an incremental ACE in addressing the debt bias? Evidence from corporate tax returns," Taxation Papers 72, Directorate General Taxation and Customs Union, European Commission.
    • Handle: RePEc:tax:taxpap:0072
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    File URL: https://ec.europa.eu/taxation_customs/sites/taxation/files/taxation-paper-72-ace.pdf
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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. European Commission, 2018. "Tax Policies in the European Union: 2018 Survey," Taxation Survey 2018, Directorate General Taxation and Customs Union, European Commission.
    3. Martina Rechbauer & Silke Rünger, 2024. "Measuring the impact of tax loss carryforwards on capital structure choice: the accuracy of earnings-based proxies," Review of Managerial Science, Springer, vol. 18(6), pages 1681-1708, June.
    4. European Commission, 2019. "Tax Policies in the European Union: 2020 Survey," Taxation Survey 2020, Directorate General Taxation and Customs Union, European Commission.
    5. Emilia Gschossmann & Jost H. Heckemeyer & Jessica M. Müller & Christoph Spengel & Julia Spix & Sophia Wickel, 2026. "The EU’s new era of “fair company taxation”: the impact of DEBRA and Pillar Two on the EU Member States’ effective tax rates," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 33(1), pages 329-373, February.
    6. 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.
    7. Ernesto Zangari, 2020. "An economic assessment of the evolution of the corporate tax system in Italy," Temi di discussione (Economic working papers) 1291, Bank of Italy, Economic Research and International Relations Area.
    8. 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.

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    Keywords

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    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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