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The effect of corporate taxes on investment: Evidence from the Colombian firms

Author

Listed:
  • Ligia Alba Melo-Becerra

    () (Banco de la República de Colombia)

  • Javier Ávila Mahecha

    () (Dirección de Impuestos y Aduanas Nacionales)

  • Jorge Enrique Ramos-Forero

    () (Banco de la República de Colombia)

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. Classification JEL: H32, H25, C23, D22

Suggested Citation

  • Ligia Alba Melo-Becerra & Javier Ávila Mahecha & Jorge Enrique Ramos-Forero, 2017. "The effect of corporate taxes on investment: Evidence from the Colombian firms," Borradores de Economia 1001, Banco de la Republica de Colombia.
  • Handle: RePEc:bdr:borrec:1001
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Corporate taxes; Marginal effective tax rate; Investment; cash flows;

    JEL classification:

    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis

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