Tax increases destroy business confidence

4 As far as the control variables are concerned, higher real GDP per capita (higher income) and an increase in asset prices (higher wealth) are linked with a rise of consumer confidence. The effect of the real interest rate and inflation are insignificant, whereas an increase in unemployment, contrary to what one would expect, has a positive effect on consumer confidence. We should highlight here though the effects on unemployment are at least one order of magnitude smaller that the other effects documented. Regarding the effects of taxation, we find that higher total direct and direct business taxes lead to significant reductions of business confidence. However, the effect of total direct taxes is much more pronounced. Taken together with the government spending estimates, one could interpret these findings as evidence that the overall business prospects are negatively influenced by both higher spending and higher direct taxes, as they imply an increased tax burden for the business sector (including the cases where this is done in order to finance productive public investments). On the contrary, we find that higher indirect taxes have a positive effect on business confidence, possibly because in most cases these are eventually passed on to consumers via higher consumer prices, and hence are preferred relative to higher income taxes.5,6