Trade-offs in the Design of Taxes on Corporate Profit

This paper considers of the proposals of the Mirrlees (2011) review to introduce an allowance for corporate equity (ACE) in the corporation tax system. It assesses how an ACE would affect various dimensions of corporate decision making. Broadly, the ACE would introduce neutrality in decisions as to the scale of investment and the source of finance. But it would leave distortions to mutually exclusive discrete choices, such as location decisions, and to profit shifting decisions. The paper presents some evidence on the likely impact of introducing an ACE, which depends on the government makes up for foregone revenue for corporation tax. It also considers more radical options.