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The Impact on Investment of Replacing a Retail Sales Tax With a Value-Added Tax: Evidence From Canadian Experience

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  • Smart, Michael
  • Bird, Richard M.

Abstract

Over a decade ago, several Canadian provinces replaced their retail sales taxes with value-added taxes. This paper estimates the effects of this tax substitution on business investment in these provinces. Consistent with standard investment theory, we find that the reform led to significant increases in machinery and equipment investment, at least in the short run. This evidence suggests that such a reform in a U.S. state with a similar retail sales tax may also be expected to result in increases, possibly substantial, in its capital stock.

Suggested Citation

  • Smart, Michael & Bird, Richard M., 2009. "The Impact on Investment of Replacing a Retail Sales Tax With a Value-Added Tax: Evidence From Canadian Experience," National Tax Journal, National Tax Association, vol. 62(4), pages 591-609, December.
  • Handle: RePEc:ntj:journl:v:62:y:2009:i:4:p:591-609
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    References listed on IDEAS

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    1. Alan J. Auerbach & Kevin A. Hassett & Stephen D. Oliner, 1994. "Reassessing the Social Returns to Equipment Investment," The Quarterly Journal of Economics, Oxford University Press, vol. 109(3), pages 789-802.
    2. Besley, Timothy J. & Rosen, Harvey S., 1999. "Sales Taxes and Prices: An Empirical Analysis," National Tax Journal, National Tax Association, vol. 52(2), pages 157-178, June.
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    Cited by:

    1. repec:clh:resear:v:5:y:2012:i:14 is not listed on IDEAS
    2. Richard M. Bird & Michael Smart, 2014. "VAT in a Federal System: Lessons from Canada," Public Budgeting & Finance, Wiley Blackwell, vol. 34(4), pages 38-60, December.
    3. Ferede, Ergete & Dahlby, Bev, 2012. "The Impact of Tax Cuts on Economic Growth: Evidence From the Canadian Provinces," National Tax Journal, National Tax Association, vol. 65(3), pages 563-594, September.
    4. Bev Dahlby & Ergete Ferede, 2012. "The effects of tax rate changes on tax bases and the marginal cost of public funds for Canadian provincial governments," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 19(6), pages 844-883, December.
    5. repec:clh:resear:v:4:y:2011:i:3 is not listed on IDEAS

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