Università Bocconi, A.A: Mec – Comparative public economics 1 Università Bocconi A.A Comparative public economics Giampaolo Arachi

Università Bocconi, A.A: Mec – Comparative public economics 2 Corporate income tax reform: alternative proposals Cash flow tax ACE CBIT ACE vs. CBIT Dividend taxation and corporate governance References: S. Bond “Levelling up or levelling down? Some reflections on the ACE and CBIT proposals and the future of the corporate tax base” in S. Cnossen (ed.) Taxing capital income in the European Union, OUP, 2000 C. Schutte, P. Shome, Cash-Flow Tax in P. Shome (ed.) Tax Policy Handbook, IMF, 1995

Università Bocconi, A.A: Mec – Comparative public economics 3 Corporate income tax reform: alternative proposals Cash flow tax (Meade 1978) Allowance for corporate equity (ACE) (I.F.S. 1991) Comprehensive income business tax (CBIT) (U.S. Treasury 1992)

Università Bocconi, A.A: Mec – Comparative public economics 4 Cash flow tax R-base: sales – purchases of real goods and services RF-base: sales – purchases + (borrowing + interest received) – (interest paid + debt repaid) S base: dividends paid + purchases of shares – issues of new shares RF = S + TAX

Università Bocconi, A.A: Mec – Comparative public economics 5 Cash flow tax shortcomings Transition Smaller tax rate? Procyclical tax Tax avoidance Renegotiation of tax treaties No tax on foreign investment

Università Bocconi, A.A: Mec – Comparative public economics 6 Allowance for corporate equity Allow the cost of equity finance to be deductible against corporation tax in the same way that interest payments are deductible for investments financed by debt Cost of equity finance = interest that could have been earned if the funds had been invested elsewhere x shareholders’ funds (cumulate past injections of new equity and past retentions of profits)

Università Bocconi, A.A: Mec – Comparative public economics 7 Comprehensive income business tax (CBIT) Abolition of interest deductibility

Università Bocconi, A.A: Mec – Comparative public economics 8 ACE vs CBIT ACECBIT Cost of capitalLevelling down the cost of capital for investment financed by equity to that for investment financed by debt insensitive to tax depreciation rules Levelling up the cost of capital for investment financed by debt to that for investment financed by equity depends on tax depreciation rules Statutory rateHighLow METR0positive AETRhighlow Personal taxes on dividends and interest highlow Income from subsidiaries TaxedUntaxed