Abstract
This paper examines the determinants of the effective corporate tax rates in Italy in the years 1998-2006. While from its inception in the early 1970s, the Italian business income tax regime changed only marginally for over twenty years, in the period between 1998 and 2006, the corporate tax system underwent two major reforms with the declared objective of simplifying the system and reducing the tax burden on firms. Therefore, from a tax policy perspective, the author believes Italy is an interesting case study. The empirical analysis is based on a strongly balanced panel with 5,134 companies that combine company accounts and firm survey data. The author employs a fixed effects panel regression to study the role of size, the debt ratio, the rate of profitability, labor productivity, the assets composition, and internationalization in explaining heterogeneity among firms and, therefore, their effective corporate tax rate. Furthermore, the author employs a quantile regression to analyze the impact of the variation in the effect of independent variables on the effective corporate tax rate at different quantiles of the distribution, thus, providing information on the degree of heterogeneity in firm behavior with the final aim of capturing non-linear effects of the independent variables on the tax rate. Keywords: effective corporate tax rates, tax heterogeneity, panel regression, Italy. JEL Classification: H25, H32
Highlights
The evolution of corporate tax systems has always been at the heart of policy makers debates, as well as public finance academics
This paper presents a microeconometric analysis of the determinants of effective corporate tax rates in Italy for the period 1998-2007
We expect a negative relation between this variable and the Effective corporate tax rate (ETR) due to the fact that in many tax systems, research and development (R&D) expenses benefit from specific fiscal allowances either in terms of higher depreciation rates and/or tax reliefs
Summary
Was somehow a latecomer to the corporate tax rates cut reforms initiated by most coun-. The main objective of the 1998 reform was a selective reduction in the burden of taxation aimed at narrowing the tax distortion between equity and debt financing, existing in the previous regime (as well as in any system that provides interest costs deductibility). To this end, the main change enacted by the reform was the introduction of an Allowance for Corporate Equity (ACE) in replacement of the previous uniform tax rate system. The effects of this reform are beyond the scope of this paper because of lack of data
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