The impact of full and incremental ACE systems on the cost of capital

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Kirn, T. (2015). The impact of full and incremental ACE systems on the cost of capital. Paper presented at the Annual Meeting of the Austrian Economic Association (NOeG 2015), Universität Klagenfurt.

Publication type

Presentation at Conference


Several countries have implemented full or incremental ACE systems. This raises the question, how those systems impact the cost of capital and hence the optimal capital structure. This paper extends the results of Modigliani and Miller (1958) to determine the cost of capital with an ACE in the case of uncertainty. The comparison between full and incremental ACE systems reveals that the cost of debt in the case of a full ACE is more responsive to a change in market debt-equity ratio. Additionally is shown, that the cost of levered equity of a full ACE system is smaller than that of an partial ACE system, which implies higher investment incentive. The marginal analysis elucidates the counteracting effects of the tax rate and the eligible share of equity capital in incremental ACE systems. If the eligible share of equity capital is low, the corporate tax rate should be set low as possible to attenuate the negative incentive effects of the debt advantage. Hence, there is no trade-off between incremental tax systems and higher corporate tax rates, as it is seen from a budgetary point of view. This finding is relevant for the tax policy discussion in countries that have introduced or consider introducing a full or an incremental ACE.


Microsimulation und Model Development
Auftragsforschung, since June 2009

Content of this project is the ongoing development of the Liechtenstein micro-simulation models. There are two basic models: microLIE: PIT is the model of the personal income tax system and microLIE: ... more ...


Organizational Units

  • Chair for Tax Management and the Laws of Liechtenstein and International Taxation