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Tax Reform to Promote Investment

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  • Bond, Stephen R
  • Devereux, Michael P
  • Gammie, Malcolm J

Abstract

In this paper we explain why the current UK corporation tax discourages investment, consider how large this effect is likely to be, and discuss how this tax bias against corporate investment can best be eliminated. The present corporation tax does not raise the cost of capital for all types of investment, but does raise it for investment financed by retained profits. We propose a new corporate to allowance for investment financed by equity (the Allowance for Corporate Equity). This approach not only eliminates the discouragement to investment, hut also reduces or eliminates most other distortions to company behavior that result from the current corporation tax. The new allowance can be partly financed by eliminating the present tax advantages of dividend income for tax-exempt investors, and this may have an additional benefit for investment by removing one source of pressure for high dividend pay-out ratios in the UK. Copyright 1996 by Oxford University Press.

Suggested Citation

  • Bond, Stephen R & Devereux, Michael P & Gammie, Malcolm J, 1996. "Tax Reform to Promote Investment," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 12(2), pages 109-117, Summer.
    • Handle: RePEc:oup:oxford:v:12:y:1996:i:2:p:109-17
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    Cited by:

    1. Ahmed, S., 2004. "Modelling corporate tax liabilities using company accounts: a new framework," Cambridge Working Papers in Economics 0412, Faculty of Economics, University of Cambridge.
    2. Spengel, Christoph & Li, Wei & Zinn, Benedikt & Finke, Katharina, 2011. "The Computation and Comparison of the Effective Tax Burden in Four Asian Countries," Hitotsubashi Journal of Economics, Hitotsubashi University, vol. 52(1), pages 13-39, June.
    3. Jacobs, Otto H. & Spengel, Christoph, 1999. "The effective average tax burden in the European Union and the USA: a computer-based calculation and comparison with the model of the European tax analyzer," ZEW Discussion Papers 99-54, ZEW - Leibniz Centre for European Economic Research.
    4. Ernst Fehr & Wolfgang Wiegard, 2001. "The Incidence of an Extended Ace Corporation Tax," CESifo Working Paper Series 484, CESifo.
    5. George R. Zodrow, 2019. "Should Capital Income Be Subject to Consumption-Based Taxation?," World Scientific Book Chapters, in: George R Zodrow (ed.), TAXATION IN THEORY AND PRACTICE Selected Essays of George R. Zodrow, chapter 5, pages 131-168, World Scientific Publishing Co. Pte. Ltd..
    6. Gordon, Roger & Kalambokidis, Laura & Slemrod, Joel, 2004. "Do we now collect any revenue from taxing capital income?," Journal of Public Economics, Elsevier, vol. 88(5), pages 981-1009, April.
    7. 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.

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