Can Tax Rate Changes Accelerate Investment under Entry and Exit Flexibility? – Insights from an Economic Experiment

70 Pages Posted: 31 May 2014 Last revised: 27 Jan 2022

See all articles by Rene Fahr

Rene Fahr

University of Paderborn; IZA Institute of Labor Economics

Elmar Janssen

University of Paderborn

Caren Sureth-Sloane

Paderborn University; Vienna University of Economics and Business; TRR 266 Accounting for Transparency

Date Written: 2014

Abstract

This study investigates the conditions under which tax rate changes accelerate risky investments. While tax rate increases are often expected to harm investment, analytical studies find tax rate increases may foster investment under flexibility. We design a theory-based experiment with a binomial random walk and entry-exit flexibility. We find accelerated investment upon tax rate increases irrespective of an exit option but no corresponding response to tax cuts. This asymmetry may be due to tax salience and mechanisms from irreversible choice under uncertainty. Given this evidence of unexpected tax reform effects, tax policymakers should carefully consider behavioral aspects.

Keywords: Economic Experiment, Investment Decisions, Tax Effects, Timing Flexibility, Uncertainty

JEL Classification: H25, H21, C91

Suggested Citation

Fahr, Rene and Janssen, Elmar and Sureth-Sloane, Caren, Can Tax Rate Changes Accelerate Investment under Entry and Exit Flexibility? – Insights from an Economic Experiment (2014). WU International Taxation Research Paper Series No. 2014 - 05, TRR 266 Accounting for Transparency Working Paper Series No. 68, Available at SSRN: https://ssrn.com/abstract=2442721 or http://dx.doi.org/10.2139/ssrn.2442721

Rene Fahr

University of Paderborn ( email )

Warburger Str. 100
D-33098 Paderborn
Germany
+49 5251 60 3692 (Phone)

HOME PAGE: http://www.quantitative-cg.de

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany
+49 228 38 94 0 (Phone)
+49 228 38 94 510 (Fax)

Elmar Janssen

University of Paderborn ( email )

Warburger Str. 100
Paderborn, D-33098
Germany

Caren Sureth-Sloane (Contact Author)

Paderborn University ( email )

Warburger Str. 100
Paderborn, 33098
Germany

Vienna University of Economics and Business ( email )

Welthandelsplatz 1
Vienna, Wien 1020
Austria

TRR 266 Accounting for Transparency ( email )

Warburger Straße 100
Paderborn, 33098
Germany

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