How effective is an incremental ACE in addressing the debt bias? Evidence from corporate tax returns
Antonella Caiumi  1, 2, 3, *@  , Nicola Branzoli  4@  
1 : Italian Institute of Statistics  (ISTAT)
via C. Balbo 16 - 00185 Rome -  Italy
2 : CAPP - Centro di Analisi delle Politiche Pubbliche  (CAPP Unimore)
via Berengario 51 - 41100 Modena -  Italy
3 : CEFOP - Centro Studi sull'economia della formazione e delle professioni  (CEFOP Luiss)
Viale Pola12 00198 Rome -  Italy
4 : Banca d'Italia
via Nazionale 91 - 00184 Rome -  Italy
* : Corresponding author

The Allowance for Corporate Equity (ACE) introduced in Italy in 2011 has decreased the fiscal distortion between the costs of equity and debt by introducing the deductibility from taxable income of a notional return on capital increases. In this paper we estimate the impact of the ACE on the leverage ratio of Italian manufacturing firms. Using a novel instrumental variable approach to identify the causal effect, we find that the introduction of the incremental ACE has substantially reduced the leverage ratio of its beneficiaries. The effect of the reform increases with age and decreases with the size of the enterprise. These results suggest that an incremental ACE may be an effective policy tool to reduce the leverage ratio of European firms.


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