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

Author

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  • Kari, Seppo
  • Laitila, Jussi
  • Ropponen, Olli

Abstract

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.

Suggested Citation

  • Kari, Seppo & Laitila, Jussi & Ropponen, Olli, 2018. "Investment Incentives and Tax Competition under the Allowance for Growth and Investment (AGI)," Working Papers 110, VATT Institute for Economic Research.
    • Handle: RePEc:fer:wpaper:110
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    File URL: https://www.doria.fi/handle/10024/163419
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    References listed on IDEAS

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    1. Keen, Michael & Konrad, Kai A., . "The theory of international tax competition and coordination," Chapters in Economics,, University of Munich, Department of Economics.
    2. Matthias Wrede, 2014. "Asymmetric tax competition with formula apportionment," Letters in Spatial and Resource Sciences, Springer, vol. 7(1), pages 47-60, March.
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    Cited by:

    1. Ernesto Zangari, 2020. "An economic assessment of the evolution of the corporate tax system in Italy," Temi di discussione (Economic working papers) 1291, Bank of Italy, Economic Research and International Relations Area.
    2. Seppo Kari & Londiwe Khoza & Nangamso Manjezi & Kyle McNabb, 2019. "Combatting debt bias in South African firms: The case for an allowance for corporate equity," WIDER Working Paper Series wp-2019-10, World Institute for Development Economic Research (UNU-WIDER).
    3. Kunka Petkova & Alfons J. Weichenrieder, 2020. "The relevance of depreciation allowances as a fiscal policy instrument: A hybrid approach to CCCTB?," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 47(3), pages 579-610, August.

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    More about this item

    Keywords

    Corporate Income Tax; Investments; Tax Competition; Allowance for Growth and Investment (AGI); Allowance for Corporate Equity (ACE); Common Corporate Tax Base (CCTB); Common Consolidated Corporate Tax Base (CCCTB); Formula Apportionment (FA); Social security; taxation and inequality; Business regulation and international economics; F21; F23; H25; H32; Verotus;
    All these keywords.

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm

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