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Investment Responses to Tax Policy under Uncertainty

Author

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  • Guceri, Irem

    (Oxford University Centre for Business Taxation, Said Business School)

  • Albinowski, Maciej

    (Ministry of Finance of 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.

Suggested Citation

  • Guceri, Irem & Albinowski, Maciej, 2019. "Investment Responses to Tax Policy under Uncertainty," MF Working Papers 34, Ministry of Finance in Poland.
  • Handle: RePEc:ris:mfplwp:0034
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    References listed on IDEAS

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    More about this item

    Keywords

    investment; uncertainty; tax policy; natural experiment; Poland;
    All these keywords.

    JEL classification:

    • C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models
    • D25 - Microeconomics - - Production and Organizations - - - Intertemporal Firm Choice: Investment, Capacity, and Financing
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies

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