Consumption Taxes and Corporate Investment

Martin Jacob, Roni Michaely and Maximilian A. Müller
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Martin Jacob: WHU - Otto Beisheim School of Management
Maximilian A. Müller: WHU - Otto Beisheim School of Management

No 19-40, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: While consumers nominally pay the consumption tax, theoretical and empirical evidence is mixed on whether corporations partly shoulder this burden, thereby, affecting corporate investment. Using a quasi-natural experiment, we show that consumption taxes decrease investment. Firms facing more elastic demand decrease investment more strongly because they bear more of the consumption tax. We corroborate the validity of our findings using 86 consumption tax changes in a cross-country panel. We document two mechanisms underlying the investment response: reduced firms’ profitability and lower aggregate consumption. Importantly, the magnitude of the investment response to consumption taxes is similar to that of corporate taxes.

Keywords: Consumption Tax; Investment; Tax Policy (search for similar items in EconPapers)
JEL-codes: G31 H24 H25 (search for similar items in EconPapers)
Pages: 51 pages
Date: 2019-08
New Economics Papers: this item is included in nep-ore, nep-pbe and nep-pub
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Citations: View citations in EconPapers (24)

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Journal Article: Consumption Taxes and Corporate Investment (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1940

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