The economic effects of EU-reforms in corporate income tax systems

− b
Π t −1 = Yt
−1
− wLt
−1
− dbt
−1Rb
Kt
−1
−δ f Dt
−1
−φIt
−1
< 0
(A.23)
The nominal value of this lagged loss can (with probability 1-q) be offset against current profits
if current profits are positive (with probability q), such that the expected tax base E(П L ) is:
E
L ⎡ q
1−
q ⎤
( Π ) = q Y − wL − d R K − D −φI
+ Π
− t − 1 ⎥ ⎦
t
⎢
⎣
t
t
bt
b
t
δ f t t
(A.24)
n
1+
r
where r n is the nominal rate of return. Compared to loss carry forward, the tax base is
unambiguously smaller under consolidation:
E
C L
−
⎛ 1−
q ⎞
( Π ) − E( Π ) = ( 1−
) Π t −1 < 0, θ = q⎜1+
⎟
⎠
θ (A.25)
n
⎝ 1+
r
where θ≤1 is the fraction of expenditures which can be deducted from total revenues. Given the
expected tax base in (A.24), dividends can be written as:
Div
b
( − q) Yt
− wLt
−[
rb
+ cb
] dbtKt
− E( Π
L t ) − It
+ dbt+ 1Kt
1 − dbtKt
g
t = qYt
+
+
1 τ (A.26)
Note that the limited deductibility of losses implies that the first-order condition for labour is
adjusted to:
⎛ qτ
⎞
1 L
n L
(A.27)
⎝ 1+
r ⎠
g
b
( −τ
) qY + ⎜1−
⎟( 1−
q) Y = ( 1−θτ
)w
which can be written as:
qY
g
L
+
b τ ⎛ q ⎞ b
( 1−
q) Y = w + ( 1−
q) ⎜1
− ⎟( w − Y )
L
1−τ
⎝
1+
r
n
⎠
L
(A.28)
which shows that limited loss offset induces an increase in labour costs, given that w≥Y b L .
The first-order conditions for investment I t , and the stock variables D t and K t now read as:
( 1− θφτ ) = (1 −φ)
λ + µ
(A.29)
δ f
λ = τ
(A.30)
R + δ
f
⎛ qτ
⎞
K K
b
(A.31)
n
⎝ 1+
r ⎠
g
b
( 1−τ
) qY + ⎜1−
⎟( 1−
q) Y = µ ( r + δ ) − d r( 1−θτ
)
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