Reforming business taxation: Lessons from Italy?

We carefully review the recent Italian reform of business taxation, compare it with other international experiences and theoretical proposals, and cal culate its effects on the cost of capital and on the effective average corp orate tax rate. We argue that the Italian reform is an original attempt to find a compromise between two conflicting aims, both of which are unavoidab le in an open economy: the first is to reduce the average rate of taxation on profits, and the second is to reduce the financial and real distortions produced by corporate taxation. In assessing the initial evidence in the It alian case, we argue that too much weight has been given to the latter obje ctive, and that further reductions in average taxation on profits may be ne eded.