The effect of corporate taxes on investment : evidence from the colombian firms

Melo-Becerra, Ligia Alba; Ávila-Mahecha, Javier; Ramos-Forero, Jorge Enrique

The effect of corporate taxes on investment : evidence from the colombian firms

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Borradores de Economía; No. 1001

Date published

2017-06-05

Date

2017-06-05

Authors

Melo-Becerra, Ligia Alba
Ávila-Mahecha, Javier
Ramos-Forero, Jorge Enrique

Document language

eng

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Las opiniones contenidas en el presente documento son responsabilidad exclusiva de los autores y no comprometen al Banco de la República ni a su Junta Directiva.

The opinions contained in this document are the sole responsibility of the author and do not commit Banco de la República or its Board of Directors.

Abstract

The paper assesses the role of taxes on investment in Colombian firms. The analysis is carried out at the firm level for the period 2003-2014. During this period, the national government set five different tax reforms, including changes in the statutory tax rates, tax credits and incentives for corporate investment. The effect of corporate taxation on investment is estimated by first determining the impact of taxation on the cost of capital by computing the effective marginal tax rates (EMTRs) at firm level. Then, we estimate the impact of the cost of capital on investment through a panel data regression. Endogeneity is controlled by an instrumental variable approach, simulating post-reform effective marginal tax rates under pre-reform firm characteristics. Results are robust with different control variables, although some significant differences by size and economic sector of the firm are found.