Local corporate tax increases squeeze small firms' finances
Portuguese municipal corporate tax increases reduce employment by about 2 percent and productivity by 2.5 percent after three years, European Central Bank research finds. Small firms face the strongest liquidity and borrowing pressures.
Higher taxes drain liquidity
The average surtax increase of 0.88 percentage points raises firms' effective tax rate by 0.76 points immediately.
Net financial debt rises about 7 percent, while liquidity falls 0.3 percentage points initially and 0.95 points after four years.
Firms delay supplier payments and borrow more at shorter maturities.
Implicit interest rates rise 0.47 percentage points after one year; the share of firms with non-performing loans increases 1.4 points after four years.
Sales relative to assets fall 2.1 percentage points after two years.
Labor costs decline 3 percent, exceeding the employment reduction and implying lower compensation per worker.
Larger firms show no statistically significant financial response.
Linked records trace the damage
João B. Duarte and Afonso S. Moura link Portuguese corporate accounts to Bank of Portugal credit records for 2009–2021.
Their European Central Bank (ECB) Working Paper 3309 uses local-projection difference-in-differences, excluding controls exposed to nearby tax changes in time.
The restricted sample contains 2,086,873 firm-year observations.
Tax increases raise exit probability by 2.2 percentage points and relocation probability by 7.7 points.
The authors' views do not necessarily reflect those of the ECB.
Financial amplification remains unproven
The authors document financial strain followed by weaker activity, but do not separately identify the causal link between them.
Their estimates depend on counterfactual parallel trends.
Neighboring areas gain some firms but no detectable output, limiting the case for offsetting local gains.