Allowance for Corporate Equity - A solution to the debt equity bias in Sweden?
(2014) NEKH01 20141Department of Economics
- Abstract
- The debt equity bias refers to the discrimination between debt and equity finance. This discrimination is problematic since it distorts companies’ decisions and increases systemic risk. The European Commission has recommended Sweden to eliminate or reduce the bias and the Swedish Ministry of Finance has gathered a committee to investigate possible solutions. Sørensen (2010) suggested that Sweden would benefit from implementing a reform called Allowance for Corporate Equity. An Allowance for Corporate Equity, often referred to as ACE, would introduce a deduction for equity similar to the existing deduction for interest payments, eliminating the debt equity bias. It also offers other attractive features such as leaving marginal investment... (More)
- The debt equity bias refers to the discrimination between debt and equity finance. This discrimination is problematic since it distorts companies’ decisions and increases systemic risk. The European Commission has recommended Sweden to eliminate or reduce the bias and the Swedish Ministry of Finance has gathered a committee to investigate possible solutions. Sørensen (2010) suggested that Sweden would benefit from implementing a reform called Allowance for Corporate Equity. An Allowance for Corporate Equity, often referred to as ACE, would introduce a deduction for equity similar to the existing deduction for interest payments, eliminating the debt equity bias. It also offers other attractive features such as leaving marginal investment unaffected by taxation. Belgium, Croatia, Italy and Brazil are countries that have implemented ACE like reforms. These reforms are discussed and used to draw conclusions regarding the design of a Swedish ACE.
The biggest problem of an implementation of the Allowance for Corporate Equity is that it narrows the tax base and consequently requires funding. It is often suggested that the statutory corporate tax rate needs to be increased to fund the reform but other alternatives that are less distortive are also discussed in this paper. Considering the current tax competition in Europe, the positive aspects of an ACE would struggle to outweigh the negative effects from an increased corporate tax rate. Sweden is unlikely to implement an ACE since it is supposed to be financed within the area of corporate taxation. If other sources of funding were allowed, an ACE would have been a more plausible option. A source of funding that seemed particularly interesting was the reintroduction of the recurrent property tax that was replaced by a low fee in 2008. The low fee together with the deductibility of interest payments and low amortization requirements channel too much investment into the housing market and implies a distortion of investment. A reintroduction of the recurrent property tax would generate revenue and eliminate the distortion. (Less)
Please use this url to cite or link to this publication:
http://lup.lub.lu.se/student-papers/record/4462702
- author
- Hillenius, Natasha LU
- supervisor
- organization
- course
- NEKH01 20141
- year
- 2014
- type
- M2 - Bachelor Degree
- subject
- keywords
- Allowance for Corporate Equity, ACE, Debt Equity Bias, Capital structure, Notional interest rate
- language
- English
- id
- 4462702
- date added to LUP
- 2014-06-23 22:12:33
- date last changed
- 2014-06-23 22:12:33
@misc{4462702,
abstract = {{The debt equity bias refers to the discrimination between debt and equity finance. This discrimination is problematic since it distorts companies’ decisions and increases systemic risk. The European Commission has recommended Sweden to eliminate or reduce the bias and the Swedish Ministry of Finance has gathered a committee to investigate possible solutions. Sørensen (2010) suggested that Sweden would benefit from implementing a reform called Allowance for Corporate Equity. An Allowance for Corporate Equity, often referred to as ACE, would introduce a deduction for equity similar to the existing deduction for interest payments, eliminating the debt equity bias. It also offers other attractive features such as leaving marginal investment unaffected by taxation. Belgium, Croatia, Italy and Brazil are countries that have implemented ACE like reforms. These reforms are discussed and used to draw conclusions regarding the design of a Swedish ACE.
The biggest problem of an implementation of the Allowance for Corporate Equity is that it narrows the tax base and consequently requires funding. It is often suggested that the statutory corporate tax rate needs to be increased to fund the reform but other alternatives that are less distortive are also discussed in this paper. Considering the current tax competition in Europe, the positive aspects of an ACE would struggle to outweigh the negative effects from an increased corporate tax rate. Sweden is unlikely to implement an ACE since it is supposed to be financed within the area of corporate taxation. If other sources of funding were allowed, an ACE would have been a more plausible option. A source of funding that seemed particularly interesting was the reintroduction of the recurrent property tax that was replaced by a low fee in 2008. The low fee together with the deductibility of interest payments and low amortization requirements channel too much investment into the housing market and implies a distortion of investment. A reintroduction of the recurrent property tax would generate revenue and eliminate the distortion.}},
author = {{Hillenius, Natasha}},
language = {{eng}},
note = {{Student Paper}},
title = {{Allowance for Corporate Equity - A solution to the debt equity bias in Sweden?}},
year = {{2014}},
}