Impuestos corporativos y desempe


Corporate Taxes and Firms' Performance: Evidence from an Emerging Economy

Impostos corporativos e desempenho das empresas: evidência para uma economia emergente


Corporate taxes have a central role in a firm's decision-making, which in turn affects economic activity and has implications for a country's fiscal accounts (Hanlon & Heitzman, 2010). Taxes might affect the performance of firms through different channels. Vartia (2008) points out three specific channels through which taxes can affect the performance of companies. Specifically, taxes can distort the efficient allocation of resources, affect the funding incentives by impacting the firm's expected return after taxes and can favor or discourage investment in research and development by affecting its after-tax cost.

During the last decades, Colombian governments have approved frequent tax reforms. The tax system is complex and offers several tax incentives to firms. In particular, the government grants tax credits and discounts that may benefit some firms more than others, depending on characteristics such as the sector where they operate, the size of the firm, its location, and its debt ratio, among others (Garay-Salamanca & Espitia-Zamora, 2019). For example, in 2015, the tax benefits granted by the Colombian government to companies amounted to 0.8 % of GDP (Parra et al., 2016). Thus, studying the relationship between corporate taxes and the performance of firms might shed some light on the degree of effectiveness of the tax policies implemented in the country. The analysis considers differences across economic sectors since some industries could be more affected by taxes than others, given that the effective tax burden varies with the capital-labor ratio, the portfolio of assets, and the level of indebtedness, among other firms' characteristics. Moreover, the government grants tax benefits to firms of specific economic sectors.

An analysis of firms' efficiency from different economic sectors should consider they use different technologies to transform inputs into outputs. For instance, technologies used in firms belonging to the trade sector differ widely from those used in the agricultural one. Thus, firm performance, measured as the ability to obtain the maximum product given a set of inputs and a fixed technology, cannot be evaluated under the same production frontier. For this reason, our empirical analysis was carried out using meta-frontier stochastic techniques, which allowed us to estimate the efficiency of firms within each economic sector and between them in relation to the set of firms in the country. Specifically, we follow the two-steps methodology proposed by Huang et al. (2014), which allowed us to consider that firms operating in different economic sectors should be assessed under different production frontiers. Then, using quantile regression analysis, we estimated both the effect of corporate taxation on firm performance, as well as the reverse causality, considering the behavioral effects of firms on tax changes.

The empirical analysis was carried out for two periods, 2010-2012 and 2013-2015, using a panel of firms belonging to the following economic sectors: agriculture, forestry and fishing, construction, manufacturing, wholesale and retail trade, and services. (1) This database allows us to evaluate the effect of taxes across different economic sectors and through time. During the first period, the national government adopted two major tax reforms, in 2009 and 2012, respectively. In the second period, the tax reform was approved in 2014. These reforms adjusted the corporate tax rate, the tax base, and the tax benefits granted to firms. Indeed, the corporate income tax rate had several modifications, during this period. For the period 2008-2012, the prevalent statutory rate was 33 %. The 2012 tax reform reduced the tax rate to 25 %%, but at the same time created a new tax on corporate income, named CREE, with a temporary rate of 9 % between 2013 and 2015. The revenues from this tax were used to finance the social security contributions of employees earning less than ten legal monthly minimum wages that companies previously paid directly to the country's social security system. The 2014 reform kept the tax rate at 9 % and established a surtax on the CREE tax of 5 % in 2015. This tax and the surtax were eliminated in the tax reform of 2016.

Although from an international perspective, the corporate statutory tax rate is high (Melo-Becerra et al., 2017), the Colombian tax system provides generous benefits and offers special regimes to specific economic sectors and firms, affecting the tax burden that firms effectively pay. For example, between 2004 and 2010, there was a tax deduction of 30-40 percent from the value of the investment on fixed assets. Other tax exemptions favored the use of new forest plantations, the selling of wind electricity generated energy, and the investment in social interest housing, among others. The legislation also granted a preferential rate of 9 0% for hotel services, ecotourism services, and publishing companies of scientific and cultural books and journals. It also granted preferential tax rates for economic activities carried out in areas of the country affected by the armed conflict and for newly incorporated small and medium-sized firms and non-profit organizations (Perret & Brys, 2015).

Recent literature has focused on the evaluation of the taxes on corporate sector effect--Table A. 1 in the appendix summarizes the main contributions to this literature. Most of the papers use firm-level data for the calculations, and the main analytical techniques used to determine the effect of taxes are the difference in difference approach and the ordinary least squares regression. Many empirical studies provide evidence that taxes negatively affect the corporate sector. In particular, Bartolini (2018), Schwellnus and Arnold (2008), Vartia (2008), and Gemmell et al. (2018) found that higher taxes reduced productivity, measured as total factor productivity (TFP). Meanwhile, results from Schwellnus and Arnold (2008), Vartia (2008), Zwick and Mahon (2017), Djankov et al. (2010), and Maffini et al. (2019) indicate a negative effect between taxes and investment. Similarly, Mukherjee et al. (2017) and Djankov et al. (2010) found that more taxes diminish entrepreneurship and innovation in terms of patent and business generation. In contrast, Orjinta and Agubata (2017) and An (2012) show that taxation plays an important role in the companies' capital structure due to a positive relationship with debt decisions. It is worth noting the mixed results on the effect of taxes on firm performance. Specifically, Dabla-Norris et al. (2017) indicate that taxes have a positive effect on labor productivity, sales growth, and TPF measures; Lazar and Istrate (2018) found the opposite regarding the return on assets (ROA), and Kaunitz and Egebark (2017) found no incidence on exit rate and profitability.

Taking the above aspects into consideration, the main contribution of this paper is to study the relationship between corporate taxation and the performance of firms in an emerging economy characterized by frequent tax reforms and considerable tax credits granted to companies. In addition, a novel feature of our analysis is the use of stochastic meta-frontier techniques to assess firm performance. Meta-frontier stochastic techniques allow us to compare under the same production frontier firms operating in different economic sectors that have different sets of input-output combinations and tax burdens. Then, these results are used, through a quantile regression analysis, to evaluate if tax payments have an impact on firms' performance and whether more efficient companies pay more or fewer taxes in a country that has been affected by continuous violence.

Results indicate that firms can obtain significant gains in terms of performance in different economic sectors. Nevertheless, companies of some economic sectors could benefit from better economic conditions, allowing them to be closer to the production potential of the country. When firms are classified by size, larger firms perform better compared to medium and small ones. Regarding the effect of corporate taxation on firm performance and the reverse causality, corporate taxes have a negative effect on the efficiency of firms. Besides, from the quantile regression analysis, we found that firms closer to the sector-specific frontiers paid on average higher corporate taxes in all quantiles of the tax distribution, but when compared to the meta-frontier, more efficient firms paid lower taxes. Lastly, it is worth mentioning that high levels of violence negatively affect firm efficiency.

This paper is divided into five sections, including the introduction. Section two presents the empirical strategy, which considers the stochastic meta-frontier estimations and the quantile regression analysis. Section three provides information about the data used in the analysis. In section four, we present and discuss the results of the estimations. The final section is the conclusions.

Empirical Strategy

Technical efficiency of firms operating in different economic sectors may not be comparable under the same production frontier since companies face different technologies and consequently have different sets of input-output combinations. To overcome this difficulty, in this paper, we used meta-frontier stochastic techniques to compare the efficiency of firms within each economic sector and between each sector, and the meta-frontier, which comprises firms belonging to all sectors. (2) Bearing in mind that meta-frontier models are recommended when the companies of the different groups, in our case economic sectors, use different technologies, but the same types of inputs to produce the same types of products, the variables of the firms are expressed in monetary terms, so that they...

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