Assessing the Impact of Introducing an ACE Regime - A Behavioural Corporate Microsimulation Analysis for Germany

Abstract

Die Dis cus si on Pape rs die nen einer mög lichst schnel len Ver brei tung von neue ren For schungs arbei ten des ZEW. Die Bei trä ge lie gen in allei ni ger Ver ant wor tung der Auto ren und stel len nicht not wen di ger wei se die Mei nung des ZEW dar.Dis cus si on Papers are inten ded to make results of ZEW research prompt ly avai la ble to other eco no mists in order to encou ra ge dis cus si on and sug gesti ons for revi si ons. The aut hors are sole ly respon si ble for the con tents which do not neces sa ri ly repre sent the opi ni on of the ZEW. May 2014Abstract: In their famous Mirrlees review (2011) on reforming the tax system for the 21st century, the authors put forward the introduction of an allowance for corporate equity regime. In recent years, several countries introduced an ACE regime. The main feature of an ACE regime is that it removes tax distortions on marginal investment and finance distortions. Yet, by narrowing the tax base an ACE regime potentially requires an increase in tax rates which might affect location choices and profit shifting activity negatively. In this paper, we employ a microsimulation model to determine the consequences of introducing an ACE regime in Germany. The simulation results show that granting an ACE for corporate income tax purposes results in a revenue loss of about 18%. This could be financed by an increase of the combined profit tax rate by 6 percentage points. At firm level, our analysis illustrates the heterogeneous distribution of the reform effect accross the sample. For 50% of firms between the 25th and 75th percentile, introducing an ACE regime reduces tax payments between 35% and 2%. If the ACE is combined with a tax rate adjustment, the tax effect ranges between -32% and +7.1% for firms between the 25th and 75th percentile. With respect to behavioural responses on decision margins, we find that introducing the ACE reduces the mean debt-ratio by about 1.5 percentage points in the short run. For the capital-stock we arrive at a mean short-term increase of 2.4%. Finally, our computations show that the ACE regime with adjusted profit tax rate cannot be overall tax neutral. In particular, the increase in the profit tax rate required to finance the equity allowance induces intensified outward profit-shifting activities and affects location choices negatively. In the short-run the tax revenue is therefore shown to decline to about 95% of its original level.

Combatting debt bias in South African firms: The case for an allowance for corporate equity

“…These results are quite modest in comparison to some of those found in other studies (e.g. Finke et al 2014;Zangari 2014), but somewhat better in line with those of the IMF (2016). The fairly small relative loss might be a reflection of the high debt bias in South Africa, and the fact that not many firms are using equity financing.…”

“…The study suggests that the straightforward calculations concerning the Belgian revenue loss have overestimated the costs of ACE, partly because they have not taken into account the impacts of ACE on reduced costs following from a reduction in the share of debt. Finke et al (2014) assessed the impacts on German CIT revenue in a behavioural microsimulation model, finding that revenue losses were in the region of 18 per cent.…”

The effect of tax regulation on firm value: the Turkish case of Allowance for Corporate Equity (ACE) regulation

“…Investors that have not yet observed any changes in capital structure anticipate the future increase in equity issuance and price the expected value of the tax shield that would result from the increase in equity issues. The literature starting with Staderini (2001) in Italy, Keuschnigg and Dietz (2007) in Switzerland, Princen (2012) in Belgium, Finke et al (2014) in Germany, and Petutschnig and Rünger (2017) in Austria document that firms do indeed issue more equity after the introduction of tax incentives for equity issuance. ACE regulation states that firms who increase cash capital after 1 July 2015 can benefit from the tax incentive.…”

The Effect of an Allowance for Corporate Equity on Capital Structure: Evidence From Austria

“…To control for size effects, we add Size to our model, which is measured as the natural logarithm of total assets (Schulman et al 1996). Prior empirical research has shown that smaller firms tend to have lower equity ratios than larger firms (Frank and Goyal 2009). The incentive to accumulate additional equity is therefore higher for smaller firms.…”

“…ACE tax systems have been frequently introduced into the tax policy debate over the last few years (IMF 2011;IFA 2012;Shay et al 2015;EU 2016), including the Allowance for Growth and Investment (AGI) proposal by the EU Commission in 2016 (EU 2016) and the EU's DEBRA proposal in 2022. From a fiscal perspective, the adoption of an ACE tax system narrows the tax base of firms and thus generates less tax revenue than a classical corporate income tax system (Finke et al, 2014); however, such an adoption could lead to macroeconomic welfare gains. There exist multiple examples of countries that have adopted ACE tax systems, such as Austria, Belgium, Brazil, Croatia, Cyprus, Italy, Latvia, Portugal, and Turkey.…”