ACE Tax vs ASE Tax:The Croatian and Nordic Experience for Higher Neutrality

Gruevski, Ilija and Gaber, Stevan (2015) ACE Tax vs ASE Tax:The Croatian and Nordic Experience for Higher Neutrality. International Journal of Sciences: Basic and Applied Research (IJSBAR), 24 (3). pp. 265-282. ISSN 2307-4531


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We may freely state that taxes bear two-sided nature. The first one and that is the good side of their essence is all about their role in contemporary public finance, sustaining the financial health of the modern-day state if properly managed. The second more menacing nature that occupies the interest of this article attributes to economic efficiency and the relatively high potential of taxes to disrupt the activities of economic participants, and the possibility to create a deadweight loss in the economy. Tax distortions are common for all the different groups of taxes, but for the corporate taxes are exceptionally evident. For example, one of the most typical is the distortion of corporate finance, when the choice for the financial alternative of the investment project is made. Induced by the traditional, “classical” treatment of corporate profit, according to which interest payments are deductible from the corporate income tax base, the debt source of finance is commonly considered as tax preferred as compared to the equity source of finance, which is oppositely fully taxed in most of the cases. This will provoke unusual behavior of the company, to rely more on borrowed capital, thus increasing the chances of insolvency and business failure. To eliminate the debt-equity distortions, the leading economic organizations have recommended lately, some alternative forms of corporate tax systems that preserve relative capacities to offset the excessive burden on the external equity supported investments.The Allowance for Equity Tax system is such a proposal of the OECD. It comes in 2 basic forms, the Allowance for Corporate Equity Tax system (ACE), a model from the Croatian experience and the Allowance for Shareholders Equity Tax system (ASE), known as the “Nordic” form of corporate tax. The intention of this article is to explore their properties from the view of neutrality and the allocation criteria and compare the findings with the Classical Corporation Tax (CCT), for which purpose the basic methodology of EMTR is additionally modified and extended. We hope to prove that these solutions represent solid alternatives for the “classical” approach in corporate taxation if the goals for neutrality and economic efficiency are concerned.

Item Type: Article
Subjects: Social Sciences > Economics and business
Divisions: Faculty of Economics
Depositing User: Stevan Gaber
Date Deposited: 16 Dec 2015 09:54
Last Modified: 16 Dec 2015 09:54

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