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Can Tax Rate Increases Foster Investment under Entry and Exit Flexibility? - Insights from an Economic Experiment

Fahr, René and Janssen, Elmar A. and Sureth, Caren (2014) Can Tax Rate Increases Foster Investment under Entry and Exit Flexibility? - Insights from an Economic Experiment. WU International Taxation Research Paper Series, 2014-05. WU Vienna University of Economics and Business, Universität Wien, Vienna.

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Abstract

It is well-known that taxes affect risky investment decisions. Analytical studies indicate that tax rate increases (decreases) can foster (hinder) investment if there is flexibility, in particular when an exit option is available. We design an experiment based on an analytical model with binomial random walk and entry and exit flexibility. Contrasting the underlying model, we find accelerated investment, which is often considered as an increased willingness to invest, on tax rate increases to be independent of the existence of an exit option. However, we observe this investor reaction only for a tax increase, not for a tax decrease. This behavior is driven possibly by tax salience and the mechanisms known from the theory of irreversible choice under uncertainty. Our empirical evidence suggests that the at-first-sight unexpected tax reform effects are more common than is predicted by the theoretical literature. Policy makers should therefore carefully consider the behavioral aspects when anticipating taxpayer reactions. (authors' abstract)

Item Type: Paper
Additional Information: Editors: Eva Eberhartinger, Michael Lang, Martin Zagler (Vienna University of Economics and Business), Erich Kirchler (University of Vienna) and Rupert Sausgruber (University of Innsbruck)
Keywords: Investment Decisions / Tax Effects / Timing Flexibility / Economic Experiment / Steuersatz / Erhöhung / Einfluss / Investitionsverhalten / Investitionsentscheidung
Classification Codes: RVK QL 400, QL 410, QP 780; JEL H25, H21, C91
Depositing User: ePub Administrator
Date Deposited: 25 Jun 2014 10:00
Last Modified: 14 Aug 2014 11:24
URI: http://epub.wu.ac.at/id/eprint/4182

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