No. 255: Tax Policy Uncertainty and Investment

We experimentally study how uncertainty about future profit taxation affects firms’ investment plans and other business decisions. Using a randomized information experiment with German firms, we vary perceived tax uncertainty around a common expert-based forecast of expected change in profit taxation. The treatment increases posterior uncertainty without inducing corresponding differences in changes in posterior expected tax path. Higher perceived tax uncertainty reduces planned investment, particularly in intangible investment and R&D, with stronger effects at longer planning horizons. Firms also adjust other planned decisions. Overall, the results show that the uncertainty of future profit taxation matters for firm behavior independently of the expected tax-rate changes.