Consumption Taxes and Corporate Investment
Forthcoming in: Review of Financial Studies
49 Pages Posted: 25 Jun 2016 Last revised: 20 Oct 2018
Date Written: August 30, 2018
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: Suggested Citation