We investigate the neutrality features of an ACE tax reform proposal suggested for the company tax reform in Germany. As a pure ACE tax system is not feasible in practice, certain elements have been changed in the proposal: the traditional income tax of non-corporations remains progressive; there is a flat tax rate for corporations, but there is also a tax levied on distributed profits. Similar to S-corporations in the USA, both non-corporations and corporations (if feasible) have the option to be either taxed at the personal level of the owners within the income tax or at the company level within the profit tax (so far corporate tax). In both cases, the companies have a claim on a operating expenditure for equity cost (ACE). To analyze the proposal we extend the neoclassical model by allowing for financial assets of companies. The proposal causes that investors distinguish two rates of discounting. Therefore, as we want to determine the optimal level of investment endogenously, we cannot maximize the market value of the company. The problem can be solved by maximizing the end value of the investments. We show that the proposed tax system guarantees financial, investment, legal form, and depreciation neutrality. Intertemporal or growth neutrality, however, is only generated financing investments by retaining profits.
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