Italy’s ACE Tax and Its Effect on a Firm’s Leverage

This article describes the new ACE-type system implemented in Italy since 2012. The authors first show that this system reduces but does not eliminate the financial distortion due to interest deductibility. Using a dataset of Italian companies, the authors analyze the impact of this relief on Italian firm capital structure. Despite the permanence of a tax advantage and its gradual implementation, the ACE relief is estimated to reduce significantly leverage. By decreasing default risk it is also expected to reduce systemic risk.