his paper compares the Comprehensive Business Income Tax (CBIT) and the Allowance for Corporate Equity tax (ACE) under imperfect competition using an oligopoly Salop model and a monopolistic competition model. A key insight is that the effect of a switch to either tax system depends on technology and the intensity of competition. Both tax systems are distortionary when entry is endogenous. Using the Salop model, we show that ACE (CBIT) tends to improve welfare in decreasing returns (increasing returns) to scale industries, whereas the two regimes are welfare neutral in constant returns to scale industries.

Additional Metadata
Keywords Optimal corporate taxation, Corporate tax reform, Imperfect competition, ACE, CBIT
JEL Oligopoly and Other Forms of Market Imperfection (jel D43), Business Taxes and Subsidies (jel H25)
Persistent URL dx.doi.org/10.1016/j.jpubeco.2016.12.010, hdl.handle.net/1765/122057
Journal Journal of Public Economics
Citation
Brekke, K.R., Pires, A.J.G., Schindler, D.S., & Schjelderup, G. (2017). Capital taxation and imperfect competition: ACE vs. CBIT. Journal of Public Economics, 147, 1–15. doi:10.1016/j.jpubeco.2016.12.010