Investment Responses to Tax Policy under Uncertainty

Irem Guceri and Maciej Albinowski
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Irem Guceri: Oxford University Centre for Business Taxation, Said Business School

No 34, MF Working Papers from Ministry of Finance in Poland

Abstract: How does economic uncertainty affect the impact of tax policy? To answer this question, we exploit a unique natural experiment, in which two very similar investment subsidies were implemented in the same country, two years apart: once during a period of economic stability, and once during a period of very high uncertainty. The experiment features sharp discontinuities in firm eligibility, and we conduct our analysis using tax returns (corporate and VAT) and trade data for the universe of corporations. We find that, under low uncertainty, tax incentives have strong positive effects on investment, both on the extensive and intensive margins. This aligns with the findings in several recent empirical papers. Under high uncertainty, however, the story is very different: the effect at the intensive margin is still present, but the effect at the extensive margin disappears. Together, these results suggest that: (1) some firms "wait and see" during periods of high uncertainty, even in the presence of generous incentives; and (2) periods of stability offer an important policy opportunity to encourage investment.

Keywords: investment; uncertainty; tax policy; natural experiment; Poland (search for similar items in EconPapers)
JEL-codes: C21 D25 H25 (search for similar items in EconPapers)
Pages: 18 pages
Date: 2019-04-12
New Economics Papers: this item is included in nep-pbe and nep-pub
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https://www.gov.pl/documents/1079560/1080340/MF_WP ... 7c-22d3-c7b502f568a9 Full text (application/pdf)

Related works:
Journal Article: Investment responses to tax policy under uncertainty (2021)
Working Paper: Investment Responses to Tax Policy Under Uncertainty (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:ris:mfplwp:0034

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