Consumption Taxes and Corporate Investment

Forthcoming in: Review of Financial Studies

49 Pages Posted: 25 Jun 2016 Last revised: 20 Oct 2018

See all articles by Martin Jacob

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

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 in: Review of Financial Studies. Available at SSRN: https://ssrn.com/abstract=2800146 or http://dx.doi.org/10.2139/ssrn.2800146

Martin Jacob (Contact Author)

WHU - Otto Beisheim School of Management ( email )

Burgplatz 2
D-56179 Vallendar, 56179
Germany

HOME PAGE: http://www.whu.edu/steuer

Roni Michaely

University of Geneva - Geneva Finance Research Institute (GFRI) ( email )

40 Boulevard du Pont d'Arve
Geneva 4, 1211
Switzerland

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Maximilian A. Müller

WHU - Otto Beisheim School of Management ( email )

Burgplatz 2
Vallendar, 56179
Germany

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