Consumption Taxes and Corporate Investment

Forthcoming, Review of Financial Studies

Swiss Finance Institute Research Paper No. 19-40

51 Pages Posted: 25 Jun 2016 Last revised: 11 Sep 2019

See all articles by Martin Jacob

Martin Jacob

University of Navarra, IESE Business School

Roni Michaely

The University of Hong Kong; ECGI

Maximilian A. Müller

University of Cologne

Date Written: August 30, 2018

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

JEL Classification: G31, H24, H25

Suggested Citation

Jacob, Martin and Michaely, Roni and Müller, Maximilian A., Consumption Taxes and Corporate Investment (August 30, 2018). Forthcoming, Review of Financial Studies, Swiss Finance Institute Research Paper No. 19-40, Available at SSRN: https://ssrn.com/abstract=2800146 or http://dx.doi.org/10.2139/ssrn.2800146

Martin Jacob (Contact Author)

University of Navarra, IESE Business School ( email )

Avenida Pearson 21
Barcelona, 08034
Spain

Roni Michaely

The University of Hong Kong ( email )

Pokfulam Road
Hong Kong, Pokfulam HK
China

ECGI ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Maximilian A. Müller

University of Cologne ( email )

Albertus-Magnus-Platz
Cologne, 50923
Germany

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