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Consumption Taxes and Corporate Investment

Author

Listed:
  • Martin Jacob

    (WHU - Otto Beisheim School of Management)

  • Roni Michaely

    (University of Geneva - Geneva Finance Research Institute (GFRI); Swiss Finance Institute)

  • Maximilian A. Müller

    (WHU - Otto Beisheim School of Management)

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.

Suggested Citation

  • Martin Jacob & Roni Michaely & Maximilian A. Müller, 2019. "Consumption Taxes and Corporate Investment," Swiss Finance Institute Research Paper Series 19-40, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp1940
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    Keywords

    Consumption Tax; Investment; Tax Policy;
    All these keywords.

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies

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