Discussion Paper Series in Economics, Department of Economics, Norwegian School of Economics (NHH)
Kurt R. Brekke
Capital Taxation and Imperfect Competition: ACE vs. CBIT.
(), Armando J. Garcia Pires
(), Dirk Schindler
() and Guttorm Schjelderup
Abstract: This paper studies the market and welfare effects of two
main tax reforms – the Corporate 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 income 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.; (follow links to similar papers)
JEL-Codes: D43; H25; (follow links to similar papers)
26 pages, November 3, 2014
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