Corporate taxation when firms are heterogeneous: ACE versus CBIT

TY - JOUR

T1 - Corporate taxation when firms are heterogeneous

T2 - ACE versus CBIT

AU - Schröder, Philipp J.H.

AU - Sørensen, Allan

N1 - Funding Information: We benefitted from the comments of two anonymous referees. Financial support from the Carlsberg Foundation is acknowledged. Publisher Copyright: © 2021, The Author(s), under exclusive licence to Springer Science+Business Media, LLC, part of Springer Nature.

PY - 2023/4

Y1 - 2023/4

N2 - This paper compares the Allowance for Corporate Equity (ACE) tax and the Comprehensive Business Income Tax (CBIT) in a general equilibrium model with firms that face entry costs, fixed production costs and increasing marginal costs. We add the empirical regularity of heterogeneity (productivity and size) among firms and thus capture selection effects based on firm profitability. Corporate taxation affects selection and consequently the industry structure. An ACE tax distorts the industry structure by permitting the survival of less productive firms. In contrast, a CBIT is neutral on selection. Aggregate real income increases for an equal yield switch from ACE to CBIT. Yet, this switch hurts small low-productivity firms, while it boosts the earnings of large high-productivity firms.

AB - This paper compares the Allowance for Corporate Equity (ACE) tax and the Comprehensive Business Income Tax (CBIT) in a general equilibrium model with firms that face entry costs, fixed production costs and increasing marginal costs. We add the empirical regularity of heterogeneity (productivity and size) among firms and thus capture selection effects based on firm profitability. Corporate taxation affects selection and consequently the industry structure. An ACE tax distorts the industry structure by permitting the survival of less productive firms. In contrast, a CBIT is neutral on selection. Aggregate real income increases for an equal yield switch from ACE to CBIT. Yet, this switch hurts small low-productivity firms, while it boosts the earnings of large high-productivity firms.

KW - Allowance for Corporate Equity (ACE)

KW - Comprehensive Business Income Tax (CBIT)

KW - Corporate debt tax shield

KW - Corporate tax reform

KW - Corporate taxation

KW - Debt bias

KW - Heterogeneous firms

KW - Industry dynamics

KW - Selection

UR - http://www.scopus.com/inward/record.url?scp=85122666294&partnerID=8YFLogxK

U2 - 10.1007/s10797-021-09714-w

DO - 10.1007/s10797-021-09714-w

M3 - Journal article

AN - SCOPUS:85122666294

SN - 0927-5940

VL - 30

SP - 396

EP - 418

JO - International Tax and Public Finance

JF - International Tax and Public Finance

IS - 2

ER -