Macroeconomic Effects of Consumption versus Income Taxes



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This paper adds to the empirical literature on the effects of tax structure on investment with a panel data analysis of up to 120 countries from 1980 to 2015. Specifically, this paper uses the relative percentage between individual income tax receipts and goods and services tax receipts as the primary explanatory variable of interest. The results, which are robust across different dynamic models, suggest that most countries are too close to the lower bound of this relative percentage to be able to spur meaningful increases in investment by shifting taxation from income to consumption. However, outlier countries heavily dependent on income taxation, like the United States, may be able to achieve as much as a 10% increase in investment by making this shift.