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The effects on investment incentives of an allowance for corporate equity tax system: the Belgian case as an example

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  • Carmen Bachmann

    (Leipzig University)

  • Martin Baumann

    (Leipzig University)

  • Konrad Richter

    (Leipzig University)

Abstract

In the past years, allowance for corporate equity (ACE) tax systems have become more popular even though they are still quite rare. An ACE tends to make a tax system neutral in respect of whether a company is financed by debt or equity. Less attention is given to the effects on investment incentives by scientific literature. We construct a model based on the principle of a hurdle rate to show whether and how an ACE system could change a company’s decision between distribution and reinvestment. The analysis is extended by implementing the so called fairness tax. We find that the influence of the fairness tax on (re)investment incentives depends on the debt to total capital ratio and the return on equity. Hence, the introduction of an ACE does only in certain cases lead to a change from distribution to reinvestment. Interestingly, the fairness tax can increase the incentive to reinvest in few situations and can make the ACE system more attractive in respect of reinvestment.

Suggested Citation

  • Carmen Bachmann & Martin Baumann & Konrad Richter, 2018. "The effects on investment incentives of an allowance for corporate equity tax system: the Belgian case as an example," Review of Quantitative Finance and Accounting, Springer, vol. 51(4), pages 943-965, November.
    • Handle: RePEc:kap:rqfnac:v:51:y:2018:i:4:d:10.1007_s11156-017-0693-2
    DOI: 10.1007/s11156-017-0693-2
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    More about this item

    Keywords

    Allowance for corporate equity; Notional interest deduction; Reinvestment incentive; Fairness tax;
    All these keywords.

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue

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