Abstract
Corporate income tax systems around the world typically favor debt over equity in the tax base definition. The resulting distortions on financing and investment decisions of corporations are well documented in the existing literature. In this paper, we focus on the ACE proposal by the Mirrlees Review [1]. It is shown that an ACE, which mitigates the unequal treatment of returns to owned and borrowed capital, fosters innovation by financing startups.
Highlights
We focus on the allowance of corporate equity (ACE) proposal by the Mirrlees Review [1]
The Mirrlees Review [1] proposes the allowance of corporate equity (ACE) as an alternative to the corporate income tax (CIT)
We discussed a promising proposition for an improvement of the corporate income tax system through public policy which we believe will improve the possibilities for financing entrepreneurship
Summary
The Mirrlees Review [1] proposes the allowance of corporate equity (ACE) as an alternative to the corporate income tax (CIT). The normal return on equity is taxed, implying the standard tax treatment of corporate income tends to discourage investment financed by equity. This effect is potentially harmful in an environment where future returns on investment are risky and loan contracts suffer from problems of asymmetric information. Innovation policy targeting startups enters public discussions recently through various policy initiatives in the United States and elsewhere. Innovation policy targeting startups enters public discussions recently through various policy initiatives in the United States and elsewhere2 All these initiatives identify the collection of funds for financing innovative projects as an obstacle for economic growth.
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