Alternative Systems of Business Tax in Europe: An applied analysis of ACE and CBIT Reforms

Ruud de Mooij and Michael Devereux

No 17, Taxation Papers from Directorate General Taxation and Customs Union, European Commission

Abstract: This paper explores the economic implications of an allowance for corporate equity (ACE), a comprehensive business income tax (CBIT) and a combination of the two in the EU. We illustrate the key trade-offs in designing ACE and CBIT in the presence of tax distortions at various decision margins of firms, such as its financial structure, investment, profit allocation and discrete location. Using an applied general equilibrium model for Europe, we quantitatively assess the effects of ACE, CBIT and combined reforms in EU countries. The results suggest that ACE is welfare improving as long as corporate tax rates are not used to cover the cost of base narrowing. CBIT typically reduces welfare by exacerbating marginal investment distortions. When governments adjust statutory corporate tax rates to balance their budget, however, CBIT reforms become more attractive while ACE reforms are welfare reducing in a number of countries. European coordination of reforms mitigates fiscal spillovers within the EU and renders ACE reforms more, and CBIT reforms less, attractive for welfare. A combination of ACE and CBIT reforms can be designed to be revenue neutral and welfare improving through smaller financial distortions.

Keywords: European Union; corporate taxation (search for similar items in EconPapers)
JEL-codes: H25 (search for similar items in EconPapers)
Pages: 155 pages
Date: 2009-05
New Economics Papers: this item is included in nep-acc and nep-pbe
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Citations: View citations in EconPapers (25)

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