CEF.UP – FIN Seminar/Webinar

Thursday – October 24^th, 2024 at 1:00 p.m. | Room 305| Online

The VAT Trap: How Consumption Tax Hikes Make Firms Pay Out More and Invest Less

Martin Jacob  – IESE Business School, University of Navarra (Spain)

Abstract:

“Using comprehensive firm-level data for 54 countries, we document that, contrary to standard economic theory, value-added tax (VAT) increases cause firms to permanently increase their cash payout and to reduce their investment. We reconcile these surprising findings using an OLG model where agents have finite lives. We show that VAT increases can come with unintended negative consequences on capital accumulation. Furthermore, the negative effects of VAT on capital accumulation critically hinge on the country’s culture. The more the country’s attitudes are oriented toward the consumption of current generations, the greater the negative consequences of VAT on capital accumulation and growth.”