Investment Incentives and Tax Competition under the Allowance for Growth and Investment (AGI)

We employ a dynamic investment model to study the investment incentives of the Allowance for Growth and Investment (AGI) proposed by the European Commission in its two-step approach towards the Common Consolidated Corporate Tax Base (CCCTB). We show that the AGI strengthens investment incentives in high-tax countries and decreases the CCCTB-induced investment push towards low-tax countries. Furthermore, we show that the AGI decreases tax competition and that a sufficiently generous AGI reduces tax competition between countries when introduced with the CCCTB. We also provide new results for the standard Allowance for Corporate Equity (ACE) discussed intensively in the literature. In particular, we show that the ACE reduces the CCCTB-induced investment push towards low-tax countries and that the ACE reduces tax competition between countries. Despite the positive implications of the AGI for investment incentives and tax competition, the ACE performs slightly better in both respects. In addition the ACE also offers better neutrality properties. On the other hand, the ACE is criticized for its possible inherent tax revenue losses; with AGI these losses would be smaller. However, the trade-off between better incentives and higher revenue loss also appears to persist with the AGI.