How Responsive are Firms to the Corporate Wealth Tax?

Abstract

The corporate wealth tax is commonly associated with a non-optimal policy in terms of fiscal revenue and efficiency. However, there is no empirical evidence regarding the behavioral response of firms to this tax. By using a bunching" methodology, which takes advantage of the non-linearities introduced by the tax design in Colombia, this paper estimates the elasticity of corporate wealth with respect to the statutory tax rate. Results indicate that, in the years when the tax is in force, we observe between 23.8% and 35.7% more firms at the wealth cuto_s where the tax rate changes. This implies estimated elasticities of 0.250 and 0.296 for firms with wealth around 3 billion pesos, which points out negative and inelastic responses of firms' wealth when facing an increase in the statutory tax rate. Absent _scal externalities, the estimated elasticities are associated with a revenue loss and marginal deadweight loss of around 1% of fiscal revenue on the evaluated taxpayer firms.