Capital taxation and imperfect competition: ACE vs. CBIT

Kurt Brekke (), Armando Garcia Pires, Dirk Schindler and Guttorm Schjelderup

No 2015/27, Working Papers from Institut d'Economia de Barcelona (IEB)

Abstract: This paper studies the market and welfare effects of two main tax reforms – the Comprehensive Business Income Tax (CBIT) and the Allowance for Corporate Equity tax (ACE). Using an imperfect-competition model for a small open economy, it is shown that the well-known neutrality property of ACE does not hold. Both corporate tax regimes distort market entry and equilibrium prices. A main result is that a small open economy should levy a positive source tax on capital in markets with free firm entry. Which tax system is better from a welfare point of view, depends on production technology, the competitive effects of ACE and CBIT, and whether entry is excessive or suboptimal at the given corporate tax rate. Imposing tax revenue neutrality yields a higher corporate tax rate with ACE, which increases the scope for CBIT to be welfare improving.

Keywords: Optimal corporate taxation; corporate tax reform; imperfect competition; ACE; CBIT (search for similar items in EconPapers)
JEL-codes: D43 H25 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2015
New Economics Papers: this item is included in nep-pub
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http://ieb.ub.edu/wp-content/uploads/2018/04/2015-IEB-WorkingPaper-27.pdf (application/pdf)

Related works:
Journal Article: Capital taxation and imperfect competition: ACE vs. CBIT (2017)
Working Paper: Capital Taxation and Imperfect Competition: ACE vs. CBIT (2014)
Working Paper: Capital Taxation and Imperfect Competition: ACE vs. CBIT (2014)
Working Paper: Capital Taxation and Imperfect Competition: ACE vs. CBIT (2014)
Working Paper: Capital Taxation and Imperfect Competition: ACE vs. CBIT (2014)
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