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The Impact on Investment of Replacing a Retail Sales Tax With a Value-Added Tax: Evidence From Canadian Experience

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  • Smart, Michael
  • Bird, Richard M.

Abstract

Over a decade ago, several Canadian provinces replaced their retail sales taxes with value-added taxes. This paper estimates the effects of this tax substitution on business investment in these provinces. Consistent with standard investment theory, we find that the reform led to significant increases in machinery and equipment investment, at least in the short run. This evidence suggests that such a reform in a U.S. state with a similar retail sales tax may also be expected to result in increases, possibly substantial, in its capital stock.

Suggested Citation

  • Smart, Michael & Bird, Richard M., 2009. "The Impact on Investment of Replacing a Retail Sales Tax With a Value-Added Tax: Evidence From Canadian Experience," National Tax Journal, National Tax Association;National Tax Journal, vol. 62(4), pages 591-609, December.
    • Handle: RePEc:ntj:journl:v:62:y:2009:i:4:p:591-609
    DOI: 10.17310/ntj.2009.4.01
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    References listed on IDEAS

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    1. Alan J. Auerbach & Kevin A. Hassett & Stephen D. Oliner, 1994. "Reassessing the Social Returns to Equipment Investment," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 109(3), pages 789-802.
    2. Besley, Timothy J. & Rosen, Harvey S., 1999. "Sales Taxes and Prices: An Empirical Analysis," National Tax Journal, National Tax Association;National Tax Journal, vol. 52(2), pages 157-178, June.
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    Citations

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    Cited by:

    1. Bev Dahlby, 2012. "Reforming the Tax Mix in Canada," SPP Research Papers, The School of Public Policy, University of Calgary, vol. 5(14), April.
    2. Thiess Buettner & Annalisa Tassi, 2023. "VAT fraud and reverse charge: empirical evidence from VAT return data," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 30(3), pages 849-878, June.
    3. Zhao, Renjie & Zhang, Jiakai, 2022. "Rent-tax substitution and its impact on firms: Evidence from housing purchase limits policy in China," Regional Science and Urban Economics, Elsevier, vol. 96(C).
    4. Jing Zhao & Wei Wang, 2024. "Impact of Tax Reductions on Public–Private Partnership Projects: Evidence from Comprehensive Implementation of China’s Business Tax to Value-Added Tax Reform," Sustainability, MDPI, vol. 17(1), pages 1-22, December.
    5. David R. Agrawal & Laura V. Zimmermann, 2024. "The Effects of Adopting a Value Added Tax on Firms," CESifo Working Paper Series 11469, CESifo.
    6. Richard M. Bird & Michael Smart, 2014. "VAT in a Federal System: Lessons from Canada," Public Budgeting & Finance, Wiley Blackwell, vol. 34(4), pages 38-60, December.
    7. Ferede, Ergete & Dahlby, Bev, 2012. "The Impact of Tax Cuts on Economic Growth: Evidence From the Canadian Provinces," National Tax Journal, National Tax Association;National Tax Journal, vol. 65(3), pages 563-594, September.
    8. Tang, Yajun & Wang, Li & Shu, Haicheng, 2024. "“Tax reduction” and the financialization of real enterprises: Evidence from China’s “VAT reform”," International Review of Economics & Finance, Elsevier, vol. 92(C), pages 835-850.
    9. Bev Dahlby & Ergete Ferede, 2012. "The effects of tax rate changes on tax bases and the marginal cost of public funds for Canadian provincial governments," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 19(6), pages 844-883, December.
    10. Michael Smart, 2011. "The Impact of Sales Tax Reform on Ontario Consumers: A First Look at the Evidence," SPP Research Papers, The School of Public Policy, University of Calgary, vol. 4(3), March.
    11. Richard M. Bird, 2014. "A Better Local Business Tax: The BVT," IMFG Papers 18, University of Toronto, Institute on Municipal Finance and Governance.
    12. Yingxu Kuang & Ted Englebrecht & Otis W. Gilley, 2011. "A Distributional Analysis of the FairTax Plan: Annual and Lifetime Income Considerations," Southern Economic Journal, John Wiley & Sons, vol. 78(2), pages 358-381, October.
    13. Bibek Adhikari, 2015. "When Does Introducing a Value-Added Tax Increase Economic Efficiency? Evidence from the Synthetic Control Method," Working Papers 1524, Tulane University, Department of Economics, revised Nov 2015.
    14. Hansen, Benjamin & Miller, Keaton & Weber, Caroline, 2022. "Vertical integration and production inefficiency in the presence of a gross receipts tax," Journal of Public Economics, Elsevier, vol. 212(C).
    15. Hoseini, Mohammad & Briand, Océane, 2020. "Production efficiency and self-enforcement in value-added tax: Evidence from state-level reform in India," Journal of Development Economics, Elsevier, vol. 144(C).
    16. Bev Dahlby & Ergete Ferede, 2011. "What Does it Cost Society to Raise a Dollar of Tax Revenue? The Marginal Cost of Public Funds," C.D. Howe Institute Commentary, C.D. Howe Institute, issue 324, March.
    17. Santiago Acosta-Ormaechea & Atsuyoshi Morozumi, 2021. "The value-added tax and growth: design matters," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 28(5), pages 1211-1241, October.
    18. Zhang, Yan & Bai, Zhuoran & Findaly, Christopher, 2021. "Value-added Tax Reform and Services Exports: Evidence from China," MPRA Paper 111184, University Library of Munich, Germany, revised 2021.

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