Investment Decisions and Tax Revenues Under an Allowance for Corporate Equity
In recent years, some European countries have relied on elements of an allow-ance for corporate equity (ACE) in the design of their tax systems. We analyse the effects of ACE-based taxation on rates of return and effective tax rates. In-vestment neutrality is lost if the imputed interest rate deviates from the market interest rate. With increasing profitability, the relative importance of the ACE compared with the statutory tax rate decreases. This might induce disadvantages for countries that compete for profitable, multinational companies. Revenue ef-fects indicate that tax rates under an ACE-based tax system should not exceed those in competing countries by much.
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