Corporate tax systems in Europe usually discriminate between debt and equity by treating interest payments as a deductible expense and equity returns as a reward for company's owners. This is called the corporate debt bias. The tax advantage of debt financing may lead to an excessive leverage in the corporate sector and a higher vulnerability to economic shocks. The tax disadvantage of equity financing might be especially harmful for new and innovative firms as they are usually financed by new equity. To assess the level of taxation for corporations, forward-looking effective tax rates using the Devereux-Griffith approach are computed by ZEW on a yearly basis for the European Commission. The study at hand incorporates different fundamental reform options into this model to overcome the corporate debt bias. Moreover, reform options for a revenue-neutral implementation will be proposed.
28.10.2015 - 28.10.2016