Effects of Corporate Tax Reforms on SMEs’ Investment Decisions under the Particular Consideration of Inflation

Corporate tax reforms carried out in EU countries since 1980 entail lower statutory tax rates and reductions in generous tax depreciation provisions. Several countries including the UK have reduced tax rates for small and medium sized enterprises (SMEs). This study compares incentive effects of such reforms on the SMEs’ investment decisions adopting a simple present value model. Ceteris paribus, tax rates and depreciation rules vary in the model simulation, while the application of historical cost accounting method in inflationary phases leads to fictitious increases in nominal net present value. Apart from the construction of international ranking, country-specific patterns of reform effects are also illustrated. This paper was presented at the 61st Congress of the International Institute of Public Finance (IIPF) held in Jeju Island, Korea in 2005. The authors are grateful to discussants and participants at the conference. Special thanks to two anonymous referees for helpful comments. Responsibility for errors remains the authors’.