Branzoli & Caiumi (2020): Italy's Incremental ACE and the Debt Bias

Summary

Branzoli and Caiumi, "How effective is an incremental ACE in addressing the debt bias? Evidence from corporate tax returns" (International Tax and Public Finance 27(6), 2020, 1485–1519; earlier version as European Commission Taxation Paper 72, 2018), evaluates Italy's allowance for corporate equity (introduced 2011) — an incremental design granting the notional deduction only on equity added after 2010, rather than on the whole equity stock as in Belgium's 2006 regime.[1]

Findings

Using Italian corporate tax-return microdata for manufacturing firms in a quasi-experimental design, the authors find the incremental ACE substantially reduced beneficiaries' leverage ratios, with effects larger for smaller and mature firms and for financially vulnerable firms than sound ones. They conclude an incremental ACE can deliver most of the debt-bias correction of a full-stock ACE at much lower revenue cost — the design margin on which Belgium's regime foundered.[1] Take-up grew steadily: the paper reports that "in 2014, 31.1 per cent of corporations benefited from the deduction, which lowered their tax debt for the Imposta sul reddito delle Società (IRES) by 5.4 percentage points" (verified against the paper's EC Taxation Paper 72 version, this session). Absent the reform the beneficiaries' effective median IRES rate would have been 28.5% — 2.3 points higher than with the ACE.

Why This Matters for the Geoist Case

Italy's ACE is the best-evaluated incremental rent-only corporate tax — and its policy history is the honesty lesson: despite favorable evaluations it was abolished (2019 Budget Law), reinstated (2020), temporarily super-charged (2021), and repealed again from 2024. Even a well-designed, well-evidenced rent-targeting instrument proved politically fragile — a pattern the wiki tracks across the instrument file on the ACE page.

See Also

• Allowance for Corporate Equity — the instrument and its country record
• Hebous & Ruf (2017) — the multinational caution
• Cash-Flow Tax — the expensing route to the same base
• Quasi-Rent — what "above-normal returns" may still contain

Sources

1. Nicola Branzoli & Antonella Caiumi (2020), "How effective is an incremental ACE in addressing the debt bias? Evidence from corporate tax returns," International Tax and Public Finance 27(6), 1485–1519 — used for all findings above; take-up figures (31.1% of corporations; 5.4pp IRES reduction, 2014) verified against the EC Taxation Paper 72 working-paper version this session (p. 7). DOI · EC Taxation Paper 72 version