Wealth Taxes and Firms’ Capital Structures: Credit Supply and Real Effects
Miguel Sarmiento (Banco de la República, Colombia), Hernán Rincón-Castro (Banco de la República, Colombia), Alejandro Granados (Inter-American Development Bank), José-Luis Peydró (Imperial College, London)
Wednesday, September 20, 2023
10:00 – 11:00 AM (EST)
HYBRID SEMINAR: Webex and Room F-3K-E-400
We study the financial and real effects of an unexpected wealth tax reform in Colombia that included a large proportion of small medium enterprises (SMEs) as new taxpayers. We employ a unique administrative dataset composed by the universe of corporate credit (bank-firm-loan level data) from credit registry matched with firms’ and banks’ balance-sheet data and with confidential tax reports at the firm and bank levels. The tax information at the firm level allows us to accurately identify taxpayers and non-taxpayers of the wealth tax. The change in the wealth tax base is associated with lower bank credit and significantly higher loan rates, especially for high-leveraged taxpayers, consistent with a reduction of bank risk-taking in the segment of firms affected by the reform. We find that affected firms increased the reliance on trade credit as a potential substitution of bank credit. We also identify that the new taxpayers exhibited substantial real effects (i.e., lower indebtedness, income, investments, and capital accumulation) compared to non-taxpayers, especially those with high leverage. Our findings suggest that taxing wealth of SMEs has significant implications on their capital structures and real outcomes as those firms are highly dependent on bank credit.
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