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

Abstract – Over a decade ago, several Canadian provinces replaced their retail sales 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 fi nd that the reform led to signifi cant 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.

I. INTRODUCTION

ales and gross receipts taxes are the largest source of Sown tax revenues in U.S. states and account for about one-fourth of state general revenues (Mikesell 2006). While most states impose traditional retail sales taxes, though with widely varying rates, bases and yields, recent reform efforts have been pulling in two very different directions—towards taxation of gross business receipts on the one hand, or of value added on the other hand. Thus, in 2005 Ohio introduced a low Michael Smart rate in addition to its existing retail sales tax, Department of and in 2007 Illinois considered replacing its sales tax with a 1 Economics, gross receipts tax (Giertz 2007). These taxes have broad bases University of Toronto, including signifi cant business-to-business transactions and Toronto, , hence distort the relative prices of business inputs, particu- M5S 3E6 larly capital goods (Pogue, 2007; Testa and Mattoon, 2007). On the other hand, in 2007 Georgia considered both replacing Richard M. Bird its with an expanded sales tax (Winters, 2007) Department of and also the possibility of replacing its sales tax with some Economics and Rotman form of value-added tax (VAT) (Wheeler and Monham, 2007). School of Management, Most interestingly, as Michigan continues to pursue its own University of Toronto, unique and interesting path with respect to state taxation, it Toronto, Ontario, has recently, without saying so, in effect adopted a form of Canada M5S 3E6

National Tax Journal 1 Washington has long had a gross receipts tax in addition to a sales tax Vol. LXIl, No. 4 (Mikesell, 2007). Uniquely, Delaware has had only a gross receipts tax since December 2009 it was fi rst introduced in 1913.

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VAT that comes close in some respects to At present, fi ve Canadian provinces that we discuss in this paper.2 operate retail sales tax (RST) systems, The conventional wisdom among pub- which are collected separately and on lic fi nance economists is that VATs are a very different basis from the federal superior to either retail sales taxes (RSTs) Goods and Services Tax (GST), a VAT on or gross receipts taxes (GRTs) that raise the consumption. Four other provinces, in same revenue. For example, RSTs usually contrast, levy VATs that are largely inte- have narrow consumption bases (which grated with the federal GST (Bird, Mintz distort relative prices of marketed goods) and Wilson, 2006). and are more susceptible to , In the simplest terms, the policy impli- while GRTs have very broad bases that cations of our analysis may be sum- encourage substantial tax cascading marized as follows. Examination of through the value added chain, which detailed revenue data for RSTs shows distorts the relative prices of business that effective tax rates on business inputs inputs, particularly capital goods. including capital goods are remarkably This paper supports the VAT approach high—indeed, about 43 percent of current by providing quantitative estimates of RST revenues in Canada are estimated to the effects on business investment of come from taxing business inputs. The converting state RSTs to destination-type situation is not very different in the United VATs, based on the experience with such States, where Ring (1999) estimates the reforms in some (but not all) Canadian “producer’s share” of RST state tax rev- provinces. To do so, we examine the actual enues to be 41 percent. Eliminating such impacts of reform in the four Canadian taxes by substituting a VAT for the RST provinces that have already adopted would have substantial effects on busi- value added bases (the “harmonizing ness investment. By our estimates, annual provinces”),3 comparing their experience machinery and equipment investment in to what happened in the same period harmonizing provinces rose 12 percent in provinces that retained their RSTs. In above trend levels in the years following effect, we treat the asymmetric nature the 1997 sales . Given the high of past sales tax reform in Canada as taxes on capital inputs in the remaining analogous to a “natural experiment” that RST provinces, it seems reasonable to allows us to control for contemporaneous expect a similarly large short run effect of changes in the economic environment that reform on investment if these jurisdictions would otherwise confound the analysis. similarly substituted a VAT for their RSTs. This permits better inferences about In principle, similar results might perhaps cause and effect than previous studies, be expected in U.S. states that did the same which have not considered a similar thing, although of course the absence of a “control group” for such a major tax national VAT in the United States makes substitution. the context for state VAT reform quite

2 Michigan introduced a new “modifi ed gross receipts tax” in January 2008, replacing the Single Business Tax, a sort of VAT levied on an addition basis on production. The new tax more closely approximates a destination- based consumption VAT, as McIntyre and Pomp (2009) show. 3 The four are Newfoundland and Labrador, and , which introduced the Har- monized Sales Tax (HST) on the same base as the federal GST in 1997, and , which during the 1990s gradually introduced the Quebec Sales Tax (QST), a VAT with a base now quite similar to the GST. In March 2009, Canada’s largest province, Ontario, announced its intention to move in July 2010 to a provincial VAT base essentially the same as the federal GST base. The new tax will, like the existing HST, be administered by the federal government along with the GST.

592 The Impact on Investment of Replacing a Retail Sales Tax with a Value-Added Tax different in some respects—an issue that result in large distributional effects. We we do not discuss further in this paper.4 therefore ignore this issue in the balance The necessary implication of high taxes of the present paper. on business inputs under RSTs is that, if The rest of the paper is organized as a VAT reform were to be revenue neutral, follows. Section II describes the sales tax then the tax burdens levied directly on systems of the Canadian provinces and personal expenditures of consumers discusses the economic problems associ- would rise substantially. For example, ated with the RST as well as those with the analysis of effective tax rates in the Cana- GRTs recently discussed and introduced dian case shows that, if RST provinces in some U.S. states. Section III presents adopted a VAT base similar to that used in an accounting analysis of the changes in the federal GST, the could remain revenues and statutory tax burdens result- similar but the base would be broadened ing from a hypothetical reform in which to include purchases of new homes and RST provinces adopted the federal GST some other additional goods and services. base, while keeping statutory tax rates at This shift in burdens from current levels. Estimates of the effect of business to consumers is typically the 1997 HST tax reform on investment regarded as a major obstacle to imple- are presented in Section IV. Section V menting such a reform. For economists, concludes. however, all taxes are ultimately paid by some people, somewhere—and never II. SYSTEMS OF SALES TAXATION by “business” as such. The economic incidence of a from an RST to The Canadian federation offers a useful a VAT depends on the extent to which laboratory for studying alternative sales business tax burdens under the RST are tax regimes. Five Canadian provinces shifted forward to consumers or shifted currently operate RSTs, while four oth- backward to factors of production like ers have adopted VATs that are largely labor, capital, and land through changes integrated with the federal VAT (the GST in prices and wages that result from the or, formally, the GST/HST, as explained tax. In a complementary paper (Smart and later). The 10th province, , benefi t- Bird, 2009), we fi nd that in the Canadian ing from its energy revenues, levies no case the pattern of relative price changes general taxes on consumption. Provin- among broad consumer expenditure cat- cial sales tax reform began in 1991 with egories was quite similar to the pattern the Quebec Sales Tax (QST), a modifi ed of relative changes in taxes and business VAT system that initially accorded only costs induced by the reform: each 1 per- limited input tax credits to fi rms. Input cent increase in costs induced by taxes led tax credits under the QST were gradually to approximately a 1 percent increase (or expanded, however, and by 1995 the base perhaps more) in the price paid by con- of the QST was largely harmonized with sumers.5 Since these results are consistent the federal GST. Bird, Mintz and Wilson with the notion that taxes are fully shifted (2006) provide a detailed description of forward in most sectors, the implication the differences between the two tax bases. is that the change in statutory burdens Further reform followed in 1997 with the associated with the tax reform does not introduction of the

4 For further discussion of this point, see Bird, Mintz and Wilson (2006) and Bird and Gendron (2009). 5 Besley and Rosen (1999) found somewhat similar results in an earlier study of U.S. state sales ; see also Poterba (1996).

593 NATIONAL TAX JOURNAL

(HST) in Newfoundland and Labrador, RSTs. The treatment of services is Nova Scotia, and New Brunswick. The complicated under the GST, with base of the HST is essentially the same as many service sectors receiving tax that of the federal GST, collection of the exempt status, while international federal and provincial taxes is unifi ed, and transportation services are in fact the provincial portion of the rate is 8 per- zero-rated.8 Moreover, the input cent in all three provinces, replacing the tax rebates paid under the GST to previous RST system that levied effective exempt suppliers in the Municipal, rates of 11 to 12 percent. Traditional RSTs Academic, Schools, and Hospitals remain in the provinces of Prince Edward (MASH) sector make these services Island, Ontario, , , much closer to zero-rated (i.e., tax and .6 free) under the GST.9 As in most U.S. states, Canadian pro- • Consumption of housing services is vincial RSTs are levied on purchases of exempt under the RSTs: payments goods (and some services) that take place of rent are untaxed, and purchases at retail points of sale. In contrast, the of owner-occupied housing are federal GST/HST is an invoice-and-credit untaxed as well. The GST also VAT, which taxes sales of most goods and exempts market rents and implicit services by registered businesses, while rents to owner-occupied housing. according full credit (offset) for taxes paid However, it taxes purchases of new on purchases of taxable goods by such houses, albeit at a reduced rate businesses.7 In practice, the chief differ- especially for properties valued at ences between the GST and RST bases less than $450,000.10 are: A. Problems with RSTs and GRTs • RSTs tax many purchases of inter- mediate inputs by businesses, but There are a number of potential dead- unlike the GST have no provision weight economic costs associated with for rebating tax paid on inputs. RSTs. First, RSTs invariably result in • Many services, even those con- substantial changes in the relative prices sumed as fi nal demand and pur- of marketed commodities, both because chased at the “retail” level, are they exempt many types of consumption, exempted from taxation under the chiefly services and intangibles, from

6 Bird and Gendron (2009) provide a recent detailed comparison of the various forms of provincial sales taxes currently levied in Canada. As they note, there are no important differences between the RSTs imposed in several Canadian provinces and the similar taxes imposed in most U.S. states. 7 Since the federal sales tax, the GST, and the three provincial VATs levied as the “Harmonized Sales Tax” have a fully integrated base and are administered together, the correct name of the combined federal-provincial VAT is the GST/HST. 8 For supplies that are tax exempt under the GST, no tax is charged on the sale, but no input tax credits may be claimed for taxable inputs that went into its production. For zero-rated supplies, in contrast, no tax is charged but input tax credits may be claimed, so that the transaction is entirely tax free. 9 For example, universities get a rebate of 67 percent of the GST that they pay to suppliers, while (since 2004) municipalities receive a 100 percent rebate, thus in effect “zero-rating” them. 10 There is a 36 percent rebate (implying an effective GST rate of about 4.5 percent when the standard rate was 7 percent) for new houses valued at less than $350,000, with the marginal rebate progressively decreasing to zero for house values over $450,000. There is a similar system under the QST, but the starting and ending points are much lower ($200,000 and $225,000, respectively). Following a two-stage reduction of the federal GST to 5 percent between 2006–2008, some of the details of the rebate system have changed but its structure remains the same. There have been no signifi cant changes in provincial sales taxes over this period. 594 The Impact on Investment of Replacing a Retail Sales Tax with a Value-Added Tax taxation and because they subject many system—should be purchases of inputs to tax. The resulting avoided whenever possible (Keen 2007). changes in relative after-tax prices of vari- Third, and most important for this ous goods and services are likely to lead paper, RSTs tax business capital inputs to large departures from tax neutrality, in signifi cant proportion. To the extent as some sectors of the economy are arti- that productivity improvements tend to fi cially favored at the expense of others. be embodied in capital goods (De Long Second, RSTs impose taxes on business and Summers, 1992), RSTs imposed on inputs. Indeed, as already mentioned, investment goods may have even more a signifi cant share of provincial “retail” far-reaching adverse consequences than sales tax revenues in Canada actually other business input taxes. We return to come from taxing business inputs. The the investment effects of RSTs in Section failure to exempt business inputs has the IV below. potential to distort business decisions A broader based alternative to state about which inputs to purchase and RSTs proposed by some commentators whether inputs are purchased in markets is the Gross Receipts Tax (GRT). The or produced in-house. Furthermore, busi- simplest form of GRT is of course the ness input taxes are typically passed on to antiquated , which taxes all consumers in the form of higher producer sales by all businesses. Even the modi- prices of some but not all commodities, fi ed GRTs recently enacted or discussed resulting in further departures from uni- in several U.S. states include signifi cant form taxation of fi nal demand. business-to-business transactions in the RSTs imposed on business inputs tax base, hence encouraging substantial appear to some commentators to be of tax cascading through the value added uncertain welfare impact, since an equal- chain and distorting the relative prices revenue tax that exempted business of business inputs, particularly capital inputs would necessarily impose higher goods. effective tax rates on final demands— As both Pogue (2007) and Testa and apparently contravening the standard Mattoon (2007) suggest, in the end the dictum that taxes should be “low-rate, only sensible way to impose a GRT is by broad-base.” However, the Diamond- introducing some form of crediting for Mirrlees production effi ciency theorem business-to-business transactions, thus establishes fairly general conditions under turning it into something as close to an which input taxes should not be used as income-type VAT as possible. Here, we part of an system. Diamond go further and suggest, as did Bird (2007), and Mirrlees showed that optimal tax that states can and should consider care- systems keep the economy at its full fully the possibility of going further and production potential whenever the tax introducing a destination-type VAT —as authority has access to both an unlimited indeed McIntyre and Pomp (2009) show set of taxes on consumer demands that Michigan has in effect just done under the are set optimally, and to direct taxes on name of a “modifi ed gross receipts tax.” pure profi ts earned in production that are It is important to note that the “income- used to fully expropriate all such profi ts. type VAT” suggested by Pogue (2007) and While these conditions are of course not Testa and Mattoon (2007)—a tax that was fully satisfi ed in the real world, there is called a BVT or business value tax by Bird nonetheless a presumption that input (2003)—and the “destination-type VAT” taxes—which distort production decisions discussed here (and in Bird, 2007) are while resulting in changes in prices that different in several important respects. In are equivalent to some input-exempting particular, as a (low rate) business benefi t 595 NATIONAL TAX JOURNAL tax the BVT is explicitly levied on the basis a more complete “paper trail” for sales of production in the taxing jurisdiction; tax auditors. The effi cacy of the system in contrast, the provincial VATs currently depends entirely on the quantity and qual- imposed in four Canadian provinces, and ity of sales tax audit. Perhaps because of to be introduced in 2010 in Ontario, are these diffi culties, no provincial (or state) standard “consumption” VATs explicitly RST comes close to excluding all business imposed only on consumption by local inputs from taxation. residents. In contrast, under invoice-and-credit VATs, such as the federal GST and its pro- B. Can Business Inputs be Exempted vincial equivalents (the HST and the QST) under RSTs? in Canada, transactions between regis- tered sellers and buyers are not exempted, In practice, signifi cant efforts are made but input taxes paid by registered buyers to exempt business inputs from tax under may be credited against tax owed on later RSTs. As observed by Bird (2007), there sales. As a result, in contrast to RSTs, are two ways to achieve this. First, the the system is inherently somewhat self- defi nition of “taxable sale” in most RST policing, as registered buyers have no jurisdiction excludes various items that incentive to evade tax on the transaction, refl ect “sales for resale.” While it is not and buyers and sellers have confl icting always clear what these terms mean, the incentives when it comes to misstating usual interpretation excludes from tax the value of the transaction on invoices for goods that are physically incorporated tax purposes. Moreover, the existence of a in other goods that are then sold for fi nal “trail” of taxable invoices that constitute consumption—e.g., wood used to build a explicitly falsifi ed documents in principle desk or inventory sold at retail. There are makes it easier to detect and prove fraud however many borderline items and the at the pre-retail level than it is to detect tax treatment varies widely under RSTs the simple non-reporting that is the most from state to state (Due and Mikesell, 1994). common form of RST fraud. Secondly, some products, notably machinery and equipment, may be III. FISCAL CONSEQUENCES specifi cally exempt from tax when sold OF SALES TAX REFORM to certain purchasers. The scope and nature of RST exemptions vary consider- The preceding discussion suggests that ably among jurisdictions, but they are reforming RSTs to eliminate business input generally administered by requiring the taxes could have potentially large conse- purchaser to provide the seller with an quences for government revenues and for offi cial certifi cate of exemption—which the distribution of tax burdens between identifi es the purchaser as a registered business and consumers, and among sec- vendor under the RST. Some systems tors of the economy. How important might require similar certifi cates for purchases such impacts be? To illustrate, we report of industrial equipment and even in a few estimates of the change in tax revenues cases for tax-free purchases of agricultural and statutory tax burdens that would inputs—even though farmers are seldom result if the remaining fi ve RST provinces if ever registered for sales tax purposes. in Canada were to replace their tax bases The purpose of such certifi cates is to with the federal GST base, while keeping facilitate control of evasion by providing statutory tax rates fi xed at current levels.11

11 In , where the RST base includes GST payments, the statutory tax rate would rise to keep the effective provincial rate constant.

596 The Impact on Investment of Replacing a Retail Sales Tax with a Value-Added Tax

The estimates of revenue impacts for fi nancial services,13 and zero-rating reported in Table 1 are based on actual of basic foods and (including revenues of the GST and each province’s interprovincial exports, as in the QST).14 RST in 2002, with effective tax rate esti- For the 2002 data, the GST statutory rate mates based on a detailed reading of the was 7 percent (although it has since been tax codes being used to attribute revenues reduced to 5 percent), while the RST rate to various sectors of the economy, using was 8 percent in Ontario, 10.7 percent weights from the 2002 provincial input- in Prince Edward Island, and 7 percent output tables. Underlying these calcula- in the other provinces. The estimated tions are very detailed estimates of the statutory tax burdens (revenues col- statutory tax burdens of the existing RST lected) are therefore just eight-sevenths and GST tax systems in 2002.12 of GST revenues in Ontario, and so on To estimate the effects of reform, sup- proportionally for the other provinces.15 pose that provinces move to the GST Table 1 presents estimates of the change base, including the same exemptions in statutory tax burdens for different and rebates for the municipal, academic, sectors of the economy under such a schools, and hospitals (MASH) sector and reform.

Table 1 Revenue Consequences of Implementing Provincial VATs ($ Millions) Prince Edward British Island Ontario Manitoba Saskatchewan Columbia Estimated change in statutory tax burdens on:

Consumers Goods 28 1,252 67 200 353 Services 11 754 70 115 722 Housing 16 1,816 73 52 549

Business Construction inputs –25 –1,553 –116 –130 –519 Other intermediate –16 –1,516 –106 –119 –516 Capital –12 –1,021 –125 –79 –351

Government –4 147 –14 –24 –15

Total impact –1 –121 –151 16 224

Total revenues 2002 179 14,419 1,123 858 3,984

Tax rate (%) 10.7 8 7 7 7 Source: 2002 Input-Output Tables, Statistics Canada, www.statcan.ca, and Department of Finance, Canada calculations.

12 Thus the calculations do not incorporate effects of the various RST reforms implemented since 2002. For ex- ample, since British Columbia subsequently enhanced the exemptions for business inputs under their RST, the reduction in revenues derived from taxing business inputs would presumably be smaller than that reported in Table 1. 13 Note that this does not mean that the GST treatment of these sectors is “ideal”; for an argument that it is not, see Bird and Gendron (2007). 14 For more on the issue of implementing a subnational VAT with differential rates among provinces, see Smart and Bird (2007). 15 Our approach assumes that exemptions and rebates for housing and the MASH sector would be the same in percentage terms as under the GST, so that effective tax rates under the hypothetical Ontario 8 percent pro- vincial VAT (PVAT) would be eight-sevenths of the corresponding GST effective rates. (As mentioned earlier, as of 2010 the Ontario 8 percent VAT will no longer be hypothetical, but real.) 597 NATIONAL TAX JOURNAL

In summary, Table 1 shows: nearly zero-rated rather than tax- exempt—so that total taxes paid on • As expected, statutory burdens on outputs and use of these sectors are business would decline substantially indeed small.17 At least in Canada, with harmonization to the GST base. replacing provincial RSTs by VATs The revenue changes are largest for would thus result in a much smaller current inputs, including construc- increase in taxes on consumer ser- tion inputs, but reductions in capital vices than might perhaps have been taxes are also substantial. Indeed, expected a priori. unreported detailed calculations • Taxes on fi nal demand in the hous- indicate that revenues from taxing ing sector would rise, primarily machinery and equipment pur- because the federal GST taxes sales chases under the RSTs are between of new houses (albeit at a reduced 4–6 percent of the corresponding rate). However, since the construc- estimates of private gross fi xed capi- tion industry also faces one of tal formation from the 2002 national the highest effective tax rates on accounts, including 4.4 percent in business inputs under RSTs, as evi- Ontario, the largest province. denced by the large decline in input • Effective tax rates on services would, taxes in Table 1, the reforms would perhaps surprisingly, change little: lead to reductions in construction the reported increase in revenues costs that offset much of the new from taxing services represents explicit taxes on housing, leaving about 0.5 percent of the correspond- changes in true economic tax bur- ing base in Ontario, and 1.4 percent dens that are relatively small.18 in British Columbia. This refl ects the • The net result of all this is that rather low effective tax rates on ser- provincial revenues would change vices under the federal GST, as well relatively little in aggregate: indeed, as some base-broadening reforms according to these estimates the in RST provinces that have made reform would be nearly revenue parts of the service sector subject neutral in most provinces.19 Of to RST. Effective tax rates are low course, such single-year estimates under the GST because of the tax- may be a poor guide to future exempt status accorded many large impacts, particularly given that services industries, including most RSTs rely so heavily on taxation of the fi nance, insurance and hous- of investment goods, one of the ing sectors, the health sector, and most volatile components of the the MASH (quasi-governmental) economy. In addition, recall that sector.16 Furthermore, as mentioned the net revenue impacts in Table earlier, many of the sectors listed 1 assume that the RST provinces are accorded large rebates for input would adopt exactly the tax exemp- taxes under the GST—they are tions and rebates for various sectors

16 Tax-exempt status implies these sectors do pay some tax under the GST, which is included in the business inputs section of the table and netted out from the much larger reduction in input taxes that results when provincial RSTs are removed. 17 See Bird and Gendron (2009) for a detailed discussion of the extensive GST “rebate” system in Canada. 18 As a rough estimate, about half of RST taxes on construction inputs relate to residential buildings, and half to non-residential structures. 19 The single exception is Manitoba, where revenues are estimated to decline by $151 million, or about $130 per capita in 2002. For more details on the effects in different RST provinces, see Smart (2007). 598 The Impact on Investment of Replacing a Retail Sales Tax with a Value-Added Tax

that are available under the federal sales taxes on capital goods are no dif- GST.20 In fact, reforming provinces, ferent than other tax reforms that reduce if they wished, could in principle the marginal effective tax rate (METR) on increase their revenues by reducing capital. Chen and Mintz (2005) calculated the rebates available to tax-favored that provincial RSTs add about 5 percent- sectors.21 age points to the marginal effective tax rate on capital on average in Canada, IV. INVESTMENT IMPACTS OF SALES with a much larger burden in Ontario. TAX REFORM Chen, Mintz and Tarasov (2007) found that RSTs raise METRs by about one-third A primary effect of reforming retail in the provinces that levy them. Reducing sales taxes in Canadian provinces and METRs on capital by eliminating the taxa- similar small open jurisdictions would tion of capital inputs under RSTs should be to eliminate the resulting sales taxes stimulate investment, both due to the on investment goods, and so perhaps hypothesized factor substitution effects to increase capital stocks in the affected and scale effects resulting from the impact industries. To the extent that productiv- of the reform on business costs. ity improvements tend to be embodied These problems with the RST base may in capital goods (De Long and Summers, be hidden from public view but are far 1992), RST taxes on investment goods from inconsequential. Baylor and Beau- may have even more far-reaching adverse séjour (2004) report results of various consequences than other business input simulated tax reforms from a dynamic, taxes. While the empirical magnitude of computable general equilibrium model of the link between machinery investment the Canadian economy. According to their and productivity is open to question for estimates, the marginal cost of a dollar in the United States as a whole (Auerbach, revenue raised by provincial governments Hassett, and Oliner, 1994), the effect has through sales taxes on capital is about been argued to be most important in a $2.30, compared to a mere $1.13 for a country like Canada with a high rate of VAT like the GST/HST. Since, as reported foreign direct investment and a resulting below, a move from provincial RSTs to the potential for technology transfer through GST base would reduce taxes on capital by investment (Globerman, Ries, and Vertin- about $1.5 billion at current rates of taxa- sky, 1994)—conditions likely to be found tion, a very rough calculation suggests the in most small sub-national jurisdictions. potential long-run gains for the economy In principle, the effects of eliminating could be as high as $1.75 billion.22

20 This assumption is required given the available data on the GST, which presents revenues net of the effects of the existing exemptions and rebates. 21 Indeed, all of the HST provinces at present provide lower rebates for some sectors than available under the GST; for details, see Bird and Gendron (2009). 22 The Baylor-Beauséjour estimate is valid only for small tax changes, and the benefi ts to large scale reform may be somewhat smaller. Note that this calculation excludes the economic benefi ts of eliminating RSTs taxes on non-capital business inputs. On the other hand, Piggott and Whalley (2001) and Emran and Stiglitz (2005) have emphasized that value added taxation may encourage the expansion of a relatively ineffi cient informal sector providing services, to the extent that these producers are not subject to the tax or can more easily evade it than can other producers. As Keen (2007) notes, however, these formal results ignore the fact that real-world invoice-and-credit VAT systems tax production in the informal sector indirectly, by denying input credits to traders that evade tax on their sales. Moreover, the issue of service taxation appears to be of only secondary importance at least in the Canadian context: the estimates below show that the effective rate of taxation of consumption of services under the GST is about 2 percent in aggregate, compared to about 1 percent under the RSTs. While the aggregate fi gures mask greater variation for narrower commodity classifi cations, the dif- ferences are relatively small. 599 NATIONAL TAX JOURNAL

The recent empirical literature points detail below and presented in Table 2.) to a strong and robust link between taxes The broad empirical strategy we follow as measured by the METR and invest- here is therefore to examine changes in ment levels (see Hassett and Newmark various measures of aggregate investment (2008) and Organisation for Economic in the harmonizing provinces compared to Co-operation and Development (2008) for the RST provinces in the years following recent surveys). the reform. Most previous studies have, however, Figure 1 shows total private investment been concerned with features of the cor- per capita23 in 1997 dollars for the 1986- porate system rather than with 2004 period, on average for Quebec, the the sales taxes on capital that are the focus HST provinces, and the fi ve provinces of this paper. It is therefore particularly that have retained their RSTs.24 Prior to interesting to examine the evidence on the the reform, investment per capita was effects of the 1997 HST reform, to which relatively low in the HST provinces, we turn next. refl ecting the traditionally lower levels of To estimate the effect of such a change GDP per capita and of capital per unit of on investment and long-run capital stocks, GDP in the Atlantic provinces. However, we turn to a retrospective analysis of the year-to-year variations in the HST and effects of the introduction of the HST in RST provinces tracked each other closely three provinces in Atlantic Canada in as both were affected by nationwide 1997. While the previous RSTs of these economic shocks. That pattern changed harmonizing provinces were not identi- dramatically following the 1997 sales cal, like the remaining provincial RSTs tax reform (the vertical line in Figure 1 is they imposed high effective tax rates between 1996 and 1997) as investment per on some capital goods, with estimated capita in the reforming provinces began average effective tax rates on machinery to rise, particularly relative to investment and equipment in 1996 ranging from 2.6 in the provinces that retained their RSTs. percent in Manufacturing to 10.4 percent Although the rise in relative investment in Construction, and averaging about appears to slow or even reverse after 1999, 4.95 percent. (Estimates of pre-reform this is as expected, since a reduction in the effective tax rates are discussed in more effective tax rate on capital goods should

Table 2 Estimates of the Investment Impact of HST Reform Machinery and Non-residental Residential Total Investment Equipment Construction Construction HST 0.111** 0.167** 0.242 –0.003 (2.41) (3.35) (1.52) (–0.08)

Logarithm of GDP 1.06*** 1.43*** 1.00 0.83* (3.68) (4.71) (1.33) (2.00)

Observations 180 180 180 180 R-squared 0.95 0.96 0.88 0.90 Notes: Asterisks denote signifi cance at the 1% (***), 5% (**), and 10% (*) levels. All specifi cations include province- specifi c linear trends and year fi xed effects, with coeffi cients not reported. Robust t statistics are in parentheses.

23 The data are for business gross fi xed capital formation, from the Provincial Economic Accounts prepared by Statistics Canada, available at www.statcan.ca. 24 Alberta, which does not levy a sales tax, is excluded.

600 The Impact on Investment of Replacing a Retail Sales Tax with a Value-Added Tax

Figure 1 Gross Investment Per Capita in HST and RST Provinces 7000 6000 5000 4000 Investment per capita (log scale) 3000

1985 1990 1995 2000 2005 year

RST provinces HST provinces Quebec

lead to a permanent rise in capital per unit on the cost of capital. For these reasons, we of output but not a permanent rise in net generally exclude the Quebec data from investment fl ows. the empirical analysis, with one exception A similar pattern appears with respect noted below. to investment per capita for Quebec, Of course, the pattern displayed in although the data in this case are more Figure 1 is only suggestive of the pos- difficult to interpret. Since VAT was sible impacts of sales tax reform, and phased in gradually under the QST dur- many other factors may have caused the ing the 1990s, there is no clear delineation increase in relative investment rates in the between pre- and post-reform periods. In HST provinces. For example, these factors addition, the phase-in, if anticipated by may include (1) a general rise in economic fi rms, might have induced them to defer growth in the HST provinces, rather than investment rather than increase it—con- investment per se, (2) long-term trends sistent with the pattern displayed in the in the HST provinces unrelated to the data. Lastly, many of the capital assets that reform, and (3) changes in the relative tend to be taxed under RSTs are still not cost of capital there that have nothing to accorded full input tax credits under the do with taxes. QST either, at least for large fi rms (Bird, To address some of these concerns Mintz and Wilson, 2006). It may therefore in a simple way, we present in Table 2 be that the QST lies “in between” a retail estimates of the effects of HST reform sales tax and a VAT in terms of its effects on investment based on a reduced-form

601 NATIONAL TAX JOURNAL regression model. In each of the regres- gross fi xed capital formation per person, sions, the logarithm of real investment as in Figure 1. The estimated coeffi cient per capita in each of the nine provinces of 0.111 for HST dummy variable indi- is regressed on the logarithm of real cates that investment per capita rose provincial GDP per capita (to control for 11.1 percent above the trend in HST provincial business cycle effects) and a provinces in post-reform years, relative dummy variable equal to one in years to RST provinces in post-reform years. and in provinces for which the HST was The difference is signifi cantly different in place and equal to zero otherwise. All from zero at the 95 percent signifi cance regressions also include estimated fi xed level. effects for each year and separate esti- The remaining three columns of Table mated linear trends for each province, not 2 report estimates of the same regression reported in the table. That is, this approach equation, using narrower components of allows for the possibility that investment investment as the dependent variable. was on average higher in Canada after In the second column, the dependent 1997 for reasons unrelated to sales tax variable is real business investment in reform or that investment grew faster over machinery and equipment (M&E)—the the sample period in, say, Newfoundland component most affected by the reform. and Labrador (a HST province) than in The effect of HST reform on M&E invest- other provinces for reasons unrelated to ment is larger, at 16.7 percent, than for the sales tax reform.25 That is, the estimating total, and signifi cantly different from zero equation is at the 95 percent confi dence level. In the third column, the dependent variable is =+αα0 + + δ real business investment in non-residen- (1) LOGINVPCit iii t t tial buildings per capita; the estimated + βγ+γ + ε it LOGGDPPCit it HST impact in this case is larger than before but not signifi cantly different from where LOGINVPC is the logarithm of zero. This is not entirely unexpected, since investment per capita in province i and the provincial RSTs that the HST replaced year t, and HST is a categorical variable tend to tax M&E investment more heavily equal to one in the HST provinces in years than investment in buildings. Nonethe- after the reform and equal to zero other- less, the point estimate is large. We discuss wise. The key coeffi cient to be estimated is this further below. β, the difference-in-differences effect of the The last column of Table 2 performs a reform. For the estimates reported below, further robustness check of the results, we calculate estimated standard errors using real investment in residential build- of estimates that are robust to arbitrary ings per capita as the dependent variable. heteroskedasticity and contemporaneous The HST reforms likely should not have correlation among provinces within the had a positive effect on housing invest- HST and RST groupings.26 ment, since housing fi nal demand is taxed In the leftmost column of figures in under the GST/HST base, and the direct Table 2, the dependent variable is real negative effect of the reform probably

25 In particular, investment in Newfoundland has risen with the development in recent years of the offshore oil sector. This is addressed in part in the regressions by including provincial GDP per capita as a control vari- able; in addition, the qualitative results of the analysis are robust to excluding Newfoundland and Labrador entirely from the data set. 26 The robust standard errors are calculated with the “cluster” option under Stata’s regress command.

602 The Impact on Investment of Replacing a Retail Sales Tax with a Value-Added Tax outweighed the indirect positive effect of investment elasticities reported in the the reduction in implicit taxes on residen- studies surveyed by Hassett and New- tial construction. However, if the results mark (2008). Of course, it is diffi cult to so far simply refl ect an improvement in compare user cost elasticities estimated asset values and investment climate in the from different studies and using different reforming provinces relative to the others, tax reforms. As pointed out by Chirinko then the regression approach might sug- (1993), the elasticity cannot be regarded gest a positive effect of HST on housing as a structural parameter of production as well. Since the results essentially show or investment adjustment cost functions, no change in housing investment in the and its identifi cation in empirical studies HST provinces relative to the others in depends heavily on the assumption of the years following the reform, the inter- static expectations about tax rates. Never- pretation that the results reported thus theless, the estimates from our reduced- far refl ect the sales tax reform rather than form approach are undeniably large. Of other contemporaneous factors is strongly course, as noted earlier, larger investment reinforced. elasticities than those for the United The estimated increase in aggregate States as a whole would presumably be investment is fairly large in proportion expected in small open economies like to the magnitude of the sales tax change. Canadian provinces (or, perhaps, the U.S. As reported in Table 3 and discussed states?). below, the effective sales tax rate on capi- Aggregate investment data may include tal purchases ranged among industries a number of confounding effects of eco- from 2.6 to 10.4 percent points in the HST nomic changes in the Atlantic provinces provinces prior to the reform, with an that were roughly coincident with the HST investment-weighted average tax rate of reform, and which are therefore not ade- 5.0 percentage points. Since the user cost quately handled by the difference-in-dif- of capital is simply proportional to one ferences strategy. Most notably, offshore plus the effective sales tax rate, the esti- oil and gas projects in Newfoundland and mated impact of the HST reform implies Nova Scotia likely boosted investment in an elasticity of investment with respect that sector for reasons unrelated to sales to the user cost of capital of 2.4—outside tax reform, and the introduction of the the typical range of 0.5–1.0 for user cost Atlantic Investment may have

Table 3 Summary Statistics Investment and Effective Sales Tax Rates by Industry (Capital and Repair Expenditures Data)

Average Provincial Pre-reform Effective Tax Rate Investment Per Capita on Investment in HST Provinces (%) (1992 $ per year) Machinery Buildings Agriculture 35.6 5.6 4.2 Mining and oil and gas 699.2 3.9 2.6 Construction 94.4 10.4 4.9 Manufacturing 603.5 2.6 4.6 and transportation 192.1 8.9 4.4 Finance and insurance 367.1 6.1 4.1 Other services 121.0 8.6 4.0 Notes: The fi gures reported are population-weighted averages of provincial per capita investment data, and of the estimated effective tax rates on investment under sales taxes in HST provinces prior to the reform. These do not correspond to national averages because some provincial observations are missing due to confi dentiality restrictions. Source: Statistics Canada, www.statcan.ca.

603 NATIONAL TAX JOURNAL had similar effects in manufacturing and provinces. These tax rates were estimated processing industries.27 by Statistics Canada on the basis of the To deal with some of these questions, 1996 provincial Input-Output tables and we turn to investment data disaggregated a detailed reading of the tax laws of each to the two-digit industry level from Statis- of the three provinces, and are calculated tics Canada’s Capital and Repair Expendi- to include the direct effect of taxes paid tures (CRE) survey.28 Unlike the Provincial on capital inputs as well as the indirect Economic Accounts (PEA) data used effects of the higher costs in capital goods- to generate the estimates in Table 2, the producing industries, assuming full for- Capital Expenditures data are available on ward shifting of the taxes (Smart and Bird a consistent basis only for the 1992–2005 2009).30 The effective tax rates were then period, and only nominal values of invest- aggregated to the level of the industry cat- ment expenditures are recorded. The data egories in Table 3, using province-specifi c are defl ated by province-specifi c implicit fi xed weights from the 1998 provincial price indexes for gross fi xed capital forma- Input-Output tables. These calculations tion derived from the PEA data. allow us to estimate the “tax shock” of Table 3 presents the average annual the 1997 reform—the extent to which investment levels per capita for each of producer prices plus sales taxes changed the six industry groupings examined, the on average in the HST provinces—for two-digit industries for Agriculture, Min- each of the major expenditure categories. ing, Construction, and Finance and Insur- The data show that the highest effective ance, and for two broader aggregates of tax rates were imposed on machinery Wholesale and Retail Trade and Transpor- and equipment investment in the Con- tation and for Other Services.29 The fi rst struction sector at a 10.4 percent average column shows the population-weighted effective rate, and that rates vary widely averages of provincial total investment among sectors, with a low of 2.6 percent per capita in each industry, an indication in Manufacturing. Estimated effective tax of the relative importance of each in the rates on buildings are above 4 percent in aggregates. most sectors, which of course refl ects not The remaining two columns report the the direct imposition of retail sales taxes effective tax rate on capital goods induced on business purchases of structures, but by the pre-reform RSTs in the harmonizing rather the RSTs on construction inputs that

27 The Atlantic Investment Tax Credit (AITC) applicable to investment in the three HST provinces (as well as in Prince Edward Island, an RST province, and in the Gaspé region of Québec) is 10 percent of most capital expenditures in manufacturing and other industries. 28 The data are available at www.statcan.ca. 29 Other Services includes all other two-digit industries except Public Administration, Education Services, and Health Care and Social Assistance, where investment decisions are likely to refl ect factors other than taxes; these sectors are therefore excluded altogether from the analysis. Since many producers in these sectors are effectively tax-exempt under the HST, effective tax rates on investment were in any case largely unaffected by the reform. 30 The estimates, which were kindly provided by Ziad Ghanem of Statistics Canada, refl ect the extent to which input taxes have increased the unit cost of commodities, the extent to which those cost increases have further

increased the cost of commodities, and so on. Algebraically, let A = (aij) denote the matrix of expenditure shares of each reproducible commodity j in the production of commodity i, derived from the 1998 input-output τ tables, and let t denote the vector of ad valorem input tax rates for all commodities in year t. Taking a fi rst order approximation to the cost functions of all sectors and employing Shephard’s lemma yields a formula –1 τ for the year t vector of rates INDTAXt = (I – A) A t that is the basis for the estimates in the data.

604 The Impact on Investment of Replacing a Retail Sales Tax with a Value-Added Tax are deemed to be “embedded” in their we next exclude Mining sector investment producer prices. For structures, the lowest from the total, and fi nd that machinery effective rate is in Mining, which presum- and equipment investment in the har- ably refl ects the large share of imported monizing provinces rose 12.1 percent capital goods in use in that sector. above trend, though the point estimate Table 4 reports further difference-in- for buildings is now essentially zero. For differences estimates of the effect of the the reasons discussed above, this is our HST reforms, based on these data. In preferred estimate of the aggregate effect the interests of brevity, only the coef- of HST reform. As a further robustness fi cients on the dummy variable for the check, results in the third row are for the HST reform are reported. All regressions baseline specifi cation including the Que- include controls for the logarithm of real bec observations, treating them as part of GDP per capita and year fixed effects the treatment group beginning in 1995, and province-specifi c linear time trends, the year that widespread input tax cred- as before. The fi rst row is the “baseline” its were available under the QST. Once specifi cation corresponding most closely again, a signifi cant positive effect remains to the results for the PEA data; in it, the for machinery and equipment. The fi nal investment data are for the aggregate of row reports broadly similar results for a all industries excluding Public Admin- “pure” difference-in-differences specifi ca- istration. The estimated coeffi cients in tion, which excludes the province-specifi c this row are similar to, but smaller than, time trends. those in Table 2, which may refl ect the Table 5 addresses the influence of shorter sample period or differences in contemporaneous changes in corporate defi nitions, with only the estimated 7.1 tax systems, which may in principle con- percent increase for the machinery and found our estimates of the impact of HST equipment category being signifi cantly reform. To do so, we obtained estimates different from zero. of the Hall-Jorgensen user cost of capital To address the possibility that the (UCC) by industry, province, and year results are confounded by unrelated for the 1993–2004 period from the federal changes in oil and gas capital investments, Department of Finance31 for each of our

Table 4 Further Estimates of the Investment Impact of HST Reform (Capital and Repair Expenditures Data) Machinery and Total Investment Equipment Non-residental Construction Baseline 0.100 0.071* 0.100 (1.68) (1.86) (0.81)

Excluding mining sector 0.010 0.121** –0.020 (0.19) (2.48) (–0.49)

Including Quebec 0.010 0.055* –0.040 (0.32) (1.82) (–0.55)

Excluding provincial trends 0.066** 0.064** 0.060 (2.40) (2.08) (1.26) Notes: Asterisks denote signifi cance at the 1% (***), 5% (**), and 10% (*) levels. Estimates are based on aggre- gated data from the Capital and Repair Expenditures Survey. Robust t statistics are in parentheses. The baseline sample is 135 observations.

31 For detail on the user cost methodology, see Department of Finance (2005).

605 NATIONAL TAX JOURNAL

Table 5 Estimates by Sector (Capital and Repair Expenditures Data) Machinery Buildings Agriculture 0.261** 0.443** (2.51) (2.76)

Construction 0.114 0.135* (1.64) (2.01)

Manufacturing 0.023 0.794** (0.15) (2.03)

Trade and transportation –0.242*** –0.492*** (–3.46) (–2.87)

Finance and insurance 0.057 0.601** (0.80) (2.18)

Other services 0.064 –0.022 (0.52) (–0.18) Notes: Asterisks denote signifi cance at the 1% (***), 5% (**), and 10% (*) levels. All specifi cations include controls for provincial log GDP per capita and the user cost of capital based on provincial and federal measures, as well as controls for unobserved province-specifi c linear trends, year, and province-industry fi xed effects, coeffi cients of which are not reported. broad industry groups except Mining.32 ations alone—that is, excluding the effect The user cost estimates are based on fi xed of input sales taxes. assumptions about the fi nancial structure The user cost data exclude two years, and fi nancial costs of representative fi rms, 1992 and 2005, covered by the investment and refl ect detailed data on the asset mix data. To keep the sample unchanged when of the different industries and the statu- the UCC is included, the 1993 UCCs are tory tax rates, capital cost allowances, and imputed for the 1992 values, and the 2004 investment tax credits in the federal and UCCs for the 2005 values. This imputa- provincial income tax laws. tion notwithstanding, the investment To control for such effects, we perform data at the two-digit industry level are difference-in-differences regressions missing for some industries, provinces, for each industry group separately and and years for reasons of confi dentiality. include the log of the estimated user This problem is especially pronounced cost of capital as an additional control among the reforming provinces, where variable. Thus the estimating equation industrial concentration is presumably becomes: higher since they are relatively small. As a consequence, the two-digit industry (1') LOGINVPC =+αα0 + t + δβ+ HST panels are unbalanced, and the regression it iii tit t sample years and provinces differ from ++ηγη + +ε UCCit LOGGDPPCit it sector to sector in the rows and columns of Table 5. For this reason, caution must where UCC is the computed user cost of be exercised in comparing estimates for cost of capital for the relevant industry, different sectors and asset groups. province, and year, based on federal and Table 5 again reports only the estimated provincial corporate income tax consider- coeffi cient for the HST reform variable

32 Corporate taxation in the Mining sector is particularly complicated. 606 The Impact on Investment of Replacing a Retail Sales Tax with a Value-Added Tax and suppresses the others for brevity. The estimates for investment in build- The unreported coeffi cient estimates for ings, reported in the second column of the UCC variable are typically very large the table, are more widely dispersed, (implausibly so) and occasionally of the and indeed some of the estimates seem wrong sign; nonetheless, in most cases implausibly large. The estimate for Manu- they are insignificantly different from facturing is a 79 percent increase. The zero. This result likely refl ects the stability estimates are signifi cantly positive in four of the user cost over the sample period, sectors and signifi cantly negative in one. which makes the variables roughly col- While our data do not allow us to inves- linear with the unobserved province tigate further the source of these large effects. There is thus insuffi cient within- point estimates, it is clear that caution is province variation in user costs to allow us warranted in attributing the estimated to distinguish the effects of this factor on effects to the HST reform. investment from other, unobserved factors that may explain the persistent differences V. CONCLUSION in per capita investment levels among the provinces. In any case, the inclusion Examination of detailed revenue data of UCC has only a negligible impact on for those Canadian provinces that still the estimated effect of the HST reform have RSTs shows that effective tax rates on in all sectors other than Manufacturing. business inputs including capital goods In Manufacturing, the estimated effect of are remarkably high. Economic theory the HST reform is a 20.3 percent increase predicts that eliminating such taxes by in machinery and equipment investment replacing RSTs with VATs would have when the UCC is excluded from the substantial effects on business investment. regression, but a mere 2.3 percent when Consistent with this theory, the preferred it is included. estimate derived in the preceding section Indeed, in most of the six sectors shown indicates that annual machinery and in Table 5, the estimated effect of HST equipment investment in the provinces reform on machinery and equipment that have already replaced RSTs by VATs investment is small and insignificant. rose 12 percent above trend levels in the In Agriculture, Fishing, and Forestry, years following the 1997 sales tax reform. however, machinery investment rose Given the high taxes on capital inputs in about 26 percent above the trend level the remaining provinces, it seems reason- following the reform, when controls for able to expect a similarly large short-run the separate impact of UCC changes are effect of reform on investment in the RST included. In the Trade and Transporta- provinces as well. tion sector, investment is estimated to Since the structure of the RST in Cana- have declined signifi cantly following the dian provinces is very similar to that in reform. Aside from Manufacturing, where many U.S. states, a priori one might expect the estimate refl ects the contemporaneous to see similar effects from a similar tax changes in corporate taxes, the smallest substitution by a U.S. state, although of point estimate is for the Finance and course the details would vary from state Insurance sector. Finance and Insurance to state depending on the structure of is the industry with the smallest change their economies and their RSTs. Smart and in effective tax rates following the HST Bird (2009) show that at least in the case reform, since a substantial portion of the of Canada the net distributional effect of sector is treated as exempt from the GST/ the tax substitution was very small. Bird HST and therefore does not receive input (2007) argues that the administrative com- credits for taxes paid on its inputs. plexities of replacing the present highly 607 NATIONAL TAX JOURNAL imperfect RSTs by workable—though Bird, Richard M., 2003. certainly not perfect—VATs are also much “A New Look at Local Business Taxes.” Tax less than many appear to think. While Notes International 30 (7), 695–711. both the distributional and administrative Bird, Richard M., 2007. aspects of such an important tax change “Is a State VAT the Answer? What’s the obviously require much closer examina- Question?” State Tax Notes 45 (13), 809–825. tion in the context of specifi c states (and Bird, Richard M., and Pierre-Pascal Gendron, indeed in the U.S. in general), the sur- 2007. prisingly strong impact on investment The VAT in Developing and Transitional Coun- demonstrated in the present paper sug- tries. Cambridge University Press, New York. gests that the possibility of substituting Bird, Richard M., and Pierre-Pascal Gendron, a VAT for state RSTs appears to warrant 2009. much closer examination than it has so far “Sales Taxes in Canada: The GST-HST- received in the United States.33 QST-RST ‘System’.” Paper presented at a Conference on Structuring a Federal VAT: ACKNOWLEDGMENTS Design and Coordination Issues, Febru- ary 18–19, sponsored by the American Tax We would like to thank Ziad Ghanem Policy Institute. Washington, DC. of Statistics Canada for access to and Bird, Richard M., Jack M. Mintz, Thomas A. assistance with data, and the participants Wilson, 2006. at the John Deutsch Institute 2006 confer- “Coordinating Federal and Provincial Sales ence on “Harmonizing the RSTs and GST Taxes: Lessons from the Canadian Experi- in Canada: Arguments and Issues” for ence.” National Tax Journal 59 (4), 889–903. advice and encouragement. We are also Chen, Duanjie, and Jack Mintz, 2005. grateful to the editor and two anonymous “Assessing Ontario’s Fiscal Competitive- referees for helpful comments that have ness.” Canadian Public Policy 31 (1), 1–28. improved the paper. An earlier version Chen, Duanjie, Jack Mintz, and Andrey of much of this paper appeared in Smart Tarasov, 2007. (2007). “Federal Provincial Tax Reforms: Let’s Get Back on Track.” Backgrounder No. 102. C.D. REFERENCES Howe Research Institute, Toronto, ON. Chirinko, Robert, 1993. Auerbach, Alan J., Kevin A. Hassett, and “Business Fixed Investment Spending: Stephen D. Oliner, 1994. Modeling Strategies, Empirical Results, and “Reassessing the Social Returns to Equip- Policy Implications.” Journal of Economic ment Investment.” Quarterly Journal of Literature 31 (4), 1875–1911. Economics 109 (3), 789–802. De Long, J. 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