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Corporate tax changes and credit costs

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Yota Deli discusses changes in the corporate tax rate across the U.S. and their implications on the pricing and quantity of loans.

Image courtesy of interviewee. December 4, 2023

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This video video revolves around a discussion of how taxation influences credit decisions, particularly from the perspective of a family with a strong academic background in economics. The speaker reflects on how tax changes can affect firms' investment behaviors and credit demands, highlighting a gap in existing research on this topic, especially regarding the differences between tax increases and decreases.

Key points include:

1. **Family Discussions**: The speaker's family engages in passionate debates about fiscal policy, particularly taxation, which led to the examination of how taxation impacts credit in the corporate sector.

2. **Research Gap**: The speaker notes that while taxation is known to influence investment decisions, its direct effects on credit decisions were under-researched due to a lack of data.

3. **Credit Market Dynamics**: The speaker explains the mechanics of the credit market—supply (mostly from banks) vs. demand (from firms)—and how taxation influences both sides.

4. **Macro vs. Micro Perspectives**: A conversation ensues about whether tax changes impact firms' profitability and their subsequent demand for credit, considering both macroeconomic and microeconomic factors.

5. **Data Analysis**: The speaker discusses using U.S. data from various states on corporate tax changes from 1987 to 2015 to explore this relationship. They performed a regression analysis to assess how tax changes affect loan pricing and amounts.

6. **Findings**:
- Tax decreases lead to lower loan spreads, indicating firms could access credit more cheaply.
- Tax increases do not significantly affect credit conditions, as banks tend to absorb the impacts to retain clients.
- Larger firms manage to restructure their debt differently, often relying less on loans when profitability increases from tax cuts.

7. **Policy Implications**: The speaker stresses that tax increases and decreases should be treated as distinct events in policy design. Different types of firms react differently to tax changes, which must be considered in economic policy-making.

8. **Conclusion**: Overall, the findings underline the need to differentiate between tax increases and decreases in economic models, as well as recognizing varied responses among firms based on their characteristics and circumstances.

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X-TIMESTAMP-MAP:LOCAL=00:00:00.000,MPEGTS=900000

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I have a little side story for this study.

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I'm coming from a family of academics

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and we have very, really passionate discussions in our

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dinner table, and we are very passionate about fiscal

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policy and taxation.

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So as you can imagine, there are like loads of stories of,

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taxation, not very pleasant

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for other families, A little bit boring.

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Um, so we are discussing about how we're thinking

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that actually the tax system, affects the firms,

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but on a different, type.

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So we know that tax can affect the decisions for investment,

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but we didn't know at all

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how tax changes can actually affect credit decisions.

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And when we discuss about credit, there are several things

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that we have to take into account.

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So credit is a whole different market, okay?

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It has exactly the same ideas as in any other market.

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So we have supply of credit.

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We have demand of credit, as we all know, supply

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of credit actually comes usually from the banks

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because the banks are the suppliers of the loans.

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And the people that, and the agents that they actually ask

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for credit, they demand for credit.

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Usually in the corporate world,

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it's actually the firms, okay?

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So the firms go into the bank, they demand for the loans.

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So we start having this discussion

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how we can actually identify what taxation does

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to investment and first

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before we end up to investment to credit, okay?

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Because credit is a big part of investment.

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And that was the discussion, the family dinner.

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And we said, okay, we have the data to understand credit.

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Uh, why not try find out a way that we can understand

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what happens with taxation and credit?

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And, funnily enough,

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although that's a very straightforward economic question,

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maybe it was

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because of the lack of data in the past, we haven't seen,

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you know, specific research done

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around exactly that question.

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So the question is how changes in taxation incorporate

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taxation affect credit?

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And this is the big question,

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which I think is a big also economic question for policy.

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Um, and the story now goes as follows.

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So we start exploring

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and we have this debate with, my brother

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and my coauthors because I start thinking I'm, I'm more

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of the macroeconomic, school of thinking,

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and that was my training.

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And I start thinking, okay,

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if we have changes in taxation directly,

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you're expecting profitability of the firms is going

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to change since profitability

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of the firms is going to change.

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Let's assume that we have a tax decrease profitability

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of the first, firms suit increase

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with the tax, decrease.

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So if this profitability increases, these guys should go out

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and ask for more demand to demand for investment.

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Okay? So they should actually demand for more credit.

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And then my coauthor partners, start saying, yeah,

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but you know, it depends

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because how do they actually demand for this credit?

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The firms actually depends on the type of debt

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that they have raised in the past.

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So we enter into this kind of, mixture of macro, micro

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Corporate literature,

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and then my other call for, manos

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and IFTA car, they start discussing, okay, yeah,

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but also it's the supply side that we have

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to take into account, okay?

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So we have to take into account both

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for the supply side comes from the banks.

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When we have a, for example, again,

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let's stick to the same example.

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When we have a tax decrease, that means

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that the profitability of the firms is going to increase.

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These firms look now better to the eyes of the bank.

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So for them, they're more

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trustworthy to give them the credit.

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So in that case, you know,

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their risk premium should decrease.

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So at least they should get like better credit,

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better loans, you know, better terms of loans.

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Um, so we have all these forces

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that they are actually contradicting each other,

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and we, start this endeavor to try to understand

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what is actually happening.

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Uh, so I would say this is a marriage between macro classic

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and new Jun literature

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and this kind of corporate finance, which I really love

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because, you know, it's all economics.

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We started exploring the literature

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and we could find separate literature from,

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the corporate finance.

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So the, the number one that I could think of is the hydro

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and vis, paper,

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because they have run, the initiators of, examining

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how taxation changes in corporate taxation actually affects

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that more accounting side,

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the corporate finance side of firms.

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So what happens when we have changes in taxation?

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What happens to their leverage? Okay?

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But also we have to take into account the traditional more

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kind of mutation literature, of, stick

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and how the supply side is formed in terms

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of the, the loan market.

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You know, it's this kind of credit rationing traditional,

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more traditional macro oriented literature that explains

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what happens with the, the loan supply curve

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of the firms firms.

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So for example, if I take you

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to the traditional demand supply graph

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that we have a demand, that it has a negative slope

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as always, but the supply has positive slope.

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What tickets comes in and says in state and vice

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and all these kind of, banking, finance

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and literature, they actually say that the supply

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of the loans can be also, less elastic.

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Okay? Or it can even go turn positive

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because, you know, the idea is

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that if you go higher interest rates, the people, the firms

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that they are actually coming in to ask

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for this credit are people

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that they're willing to take more risk.

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Okay? So you exclude all these firms

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that they don't want really high risk,

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and the people that they are going in

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and demand for more higher interest

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rates, they're more risky.

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So that makes it also more risky for the bank.

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This is the idea of the credit ings.

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So what we do is we more

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or less bo borrow, we use the dataset

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that hydro vis use,

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and that's a dataset about changes in corporate

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taxation in the states.

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This is beautiful. Why in the states,

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Because we have all the, the states,

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its state has a different level of tax rate in terms

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of corporate tax rate.

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This is beautiful because we can isolate different changes.

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So for example, when we have a change in New York,

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that change might not happen anywhere else in the us.

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So we will have a control in treatment group.

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So that means that we can compare

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what actually the change means.

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Again, this is the traditional difference

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in differences approach.

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And this is what we exploit the change,

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the different changes across the states, across the years.

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So we actually have, data from 1987 until 2015,

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we use the data on the tax changes.

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We also have data on bank characteristics

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throughout all these years.

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Firm characteristics throughout all these years.

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But most importantly, we have loan deals, okay?

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We use the syndicated loan market and we have loan deals.

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If you think that I, you would like me to go

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through a bit in the syndicated loan market, it's,

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a loan that is given by different suppliers

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to firm, and they're big.

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These are guy, these are usually big loans, okay?

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Um, so we have all these years, we have a lot

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of changes throughout this year.

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For in particular, we have 49 increases

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through these years in 27 states,

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and we also have 98 decreases in 31 states.

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Okay? So we have a plurality of events

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and then we go to try to understand

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how this is affecting credit, credit, how the interest rate

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that the firms are borrowing

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and the loan amount more or less.

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We try to understand single demand,

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some supply side effects, quantity, price,

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price in the interest rate

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of the loan quantity is the loan amount, okay?

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So that's more or less the, the general framework.

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And then what we do is in order to understand,

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so we run the first regression

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and we try to understand how the changes affect the

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price of the loan.

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Okay? Um, now one thing that it is important

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that it hasn't been sewn

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before is that hydro nuy are actually the first one

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that they try to say, you know, tax increases

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and decreases are not the same.

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We should not be treating increases

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and decreases the same way.

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It's not one event, it's a different event. Okay?

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So we separate tax increases and tax decreases exactly,

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because we expect the tax decreases might affect our firms

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differently and our banks differently than

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the tax increases.

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Let me give you an example on that to try to understand

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how we understand the theory if we have a

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tax increase, okay?

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The banks, the profitability of the firms might go down,

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but the banks might not want to use clients.

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So may, they might try to absorb this increase, you know?

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But if we have a tax decrease, that might not be the case

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because now it's more beneficial.

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The banks can actually operate in a better way,

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give out more loans, make more profits, okay?

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So that means that we have an asymmetry

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from the supply side.

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Similar comes from the demand side.

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So what we do is we exploit these bank

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characteristics that we have.

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We exploit the firm characteristics that we have,

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and we try to understand what happens.

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So first step is that we run a similar regression

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that it has different, tax increases

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and tax decreases separately, okay?

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On the price of the loans.

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And what we actually find is

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that this traditional demand effect

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that I had in my mind when we started this project,

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you know, I have a tax, decrease profitability

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increases, I should demand for more.

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So what happens then?

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That means that the price of the loan,

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since I demand for more, should increase.

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That doesn't hold, okay? So we don't observe that, okay?

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So we observe something that is either driven by supply

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or initially we observe something that depends on the firms.

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What do I mean? Depends on the firms.

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If we have small firms, okay?

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These firms, these guys might be weaker.

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So when we have a tax decrease, they might be the ones

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that they jump into, get more credit.

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But the big guys, the big players in the economy,

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what they actually do, especially

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because this is the us okay?

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And we have to deal with tax seals

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and all this kind of idea of the debt, the corporate debt,

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and how these guys structure it, what they might do is

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because they have now more profits,

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they can actually find alternative ways

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to finance new investment.

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And we observe exactly that.

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But depending on the firm size, okay,

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the results are affected.

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So the debt restructuring effect is actually the most

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prevalent effect that we find.

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Okay? We find that when we have a tax decrease of one point,

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let's assume that we have one point tax decrease

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and the corporate tax rate, we almost have a decrease

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of eight basis points in our spreads.

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What's contrary to our initial bid,

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we were surprised finding that.

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Um, then when we control for the supply side, we find

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that the supply side is not as prevalent.

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Okay? The demand side, obviously it's out

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because we should have had like an increase in the industry.

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So what is left is the debt restructuring effect.

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This is how we call it. The firms actually restructure the

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way they organize their debt,

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and we have several ways to control for that.

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So we, we play around with the firm size,

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whether the firms are highly leveraged,

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whether the firms actually own bonds,

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they're increasing their bonds,

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and what we actually find is demand site driven.

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It's mostly the demand that is affecting,

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but how these guys affect their demand

11:37.325 --> 11:38.485
structure and their debt structure.

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So that's the number one.

11:40.905 --> 11:44.245
And the second that it's especially interesting

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as well is tax increases are actually irrelevant.

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So we don't observe a significant effect when we

11:50.085 --> 11:52.725
observe tax increases. And when we,

11:52.735 --> 11:55.205
Again, control for all these ideas

11:55.345 --> 11:57.005
of the firm characteristics

11:57.585 --> 12:00.445
and the bank characteristics, we actually find the story

12:00.445 --> 12:01.845
that I told you initially.

12:02.305 --> 12:04.525
Uh, you know, when we have tax increases,

12:04.705 --> 12:07.285
the banks do not want to lose their clients, okay?

12:07.305 --> 12:08.805
So they absorb the buffer.

12:09.275 --> 12:14.045
This, so they don't offer more expensive loans, okay?

12:14.305 --> 12:16.685
To maintain their clientele.

12:17.225 --> 12:20.465
So tax increases versus tax decreases

12:20.465 --> 12:21.665
very, very different results.

12:21.765 --> 12:24.425
So we have to take that into account when we make policy

12:24.425 --> 12:27.025
implications and the reasons are very, very different.

12:27.325 --> 12:31.225
So my key takeaway is, a more general one is

12:31.225 --> 12:34.585
that when we have, when we examine taxation, for us,

12:34.615 --> 12:37.545
it's important in science to have different events,

12:37.885 --> 12:40.465
tax increases and tax decreases are very, very different.

12:41.045 --> 12:43.545
We should never have them in the same,

12:44.005 --> 12:45.305
bo bo baskets together.

12:45.655 --> 12:47.945
Okay? So there are symmetric effects.

12:48.725 --> 12:52.945
Second, the theory doesn't always provide the

12:53.185 --> 12:56.625
straightforward results theories there, I still obviously,

12:56.665 --> 12:58.625
I believe in theory, but there are effects

12:58.695 --> 13:02.505
that they're more prevalent when you conduct policy, okay?

13:02.505 --> 13:05.545
Because when you conduct policy on the higher level,

13:05.965 --> 13:08.785
you might miss how the different agents can react.

13:08.925 --> 13:10.385
And different agents are different

13:10.385 --> 13:11.705
exactly, because they're different.

13:12.145 --> 13:14.345
A a high, a big firm is a different

13:14.345 --> 13:15.545
player than a small firm.

13:15.845 --> 13:18.545
So they will have a different way to assess the policy,

13:18.545 --> 13:19.665
different buffers.

13:20.165 --> 13:24.625
Uh, so for me, I think the takeaway of that first is that

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when it comes to our question of the paper is

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that tax decreases are the important,

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they provide the important effects in credit, okay?

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They actually tax decreases, reduce the loan spreads. Okay?

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Second is that we actually find, strong,

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results, su supporting steel theory,

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and all this literature about this in elastic supply

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because we don't observe this effect of,

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following the loan amount.

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So we only have,

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we mostly observe effects in the loan pricing,

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but not on the loan amount.

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Okay? So the results are affecting mostly that suggesting

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that the loan supply curve is, more in elastic.

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Okay? And the third I would say is

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that when we design policy, we have to take into account

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parameters like exactly that.

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So more accounting level, I don't want

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to use the word micro.

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It's that every agent is different.

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So each policy might affect every agent in a different way,

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and we have to take that into account.

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In this particular case, for example, tax increases,

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we observe that they're absorbed up to now, okay?

14:36.355 --> 14:39.855
We, we only examine obviously, data of the past. Okay?

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Tax increases are absorbed, absorbed, from the banks

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because they don't want to lose, clients tax decreases.

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Okay? Then the,

14:48.475 --> 14:50.735
the game starts in the demand side of the firms.

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Big firms react in a different way than the small firms,

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depending on their debt, depending on how close they are

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to their tax yield, depending on, on different factors

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and, firm characteristics.

00:00 - I have a little side story for this study. I'm coming from a family of academics and we have very, really passionate discussions in our dinner table, and we are very passionate about fiscal policy and taxation. So as you can imagine, there are like loads of stories of,

00:15 - taxation, not very pleasant for other families, A little bit boring. so we are discussing about how we're thinking that actually the tax system, affects the firms, but on a different, type. So we know that tax can affect the decisions for investment, but we didn't know at all how tax changes can actually affect credit decisions. And when we discuss about credit, there are several things that we have to take into account.

00:43 - So credit is a whole different market, okay? It has exactly the same ideas as in any other market. So we have supply of credit. We have demand of credit, as we all know, supply of credit actually comes usually from the banks because the banks are the suppliers of the loans. And the people that, and the agents that they actually ask for credit, they demand for credit. Usually in the corporate world, it's actually the firms, okay?

01:08 - So the firms go into the bank, they demand for the loans. So we start having this discussion how we can actually identify what taxation does to investment and first before we end up to investment to credit, okay? Because credit is a big part of investment. And that was the discussion, the family dinner. And we said, okay, we have the data to understand credit. why not try find out a way that we can understand what happens with taxation and credit?

01:36 - And, funnily enough, although that's a very straightforward economic question, maybe it was because of the lack of data in the past, we haven't seen, you know, specific research done around exactly that question. So the question is how changes in taxation incorporate taxation affect credit? And this is the big question, which I think is a big also economic question for policy.

02:00 - and the story now goes as follows. So we start exploring and we have this debate with, my brother and my coauthors because I start thinking I'm, I'm more of the macroeconomic, school of thinking, and that was my training. And I start thinking, okay, if we have changes in taxation directly, you're expecting profitability of the firms is going to change since profitability

02:23 - of the firms is going to change. Let's assume that we have a tax decrease profitability of the first, firms suit increase with the tax, decrease. So if this profitability increases, these guys should go out and ask for more demand to demand for investment. Okay? So they should actually demand for more credit. And then my coauthor partners, start saying, yeah, but you know, it depends because how do they actually demand for this credit?

02:49 - The firms actually depends on the type of debt that they have raised in the past. So we enter into this kind of, mixture of macro, micro Corporate literature, and then my other call for, manos and IFTA car, they start discussing, okay, yeah, but also it's the supply side that we have to take into account, okay? So we have to take into account both for the supply side comes from the banks.

03:13 - When we have a, for example, again, let's stick to the same example. When we have a tax decrease, that means that the profitability of the firms is going to increase. These firms look now better to the eyes of the bank. So for them, they're more trustworthy to give them the credit. So in that case, you know, their risk premium should decrease. So at least they should get like better credit,

03:36 - better loans, you know, better terms of loans. so we have all these forces that they are actually contradicting each other, and we, start this endeavor to try to understand what is actually happening. so I would say this is a marriage between macro classic and new Jun literature and this kind of corporate finance, which I really love because, you know, it's all economics. We started exploring the literature

04:01 - and we could find separate literature from, the corporate finance. So the, the number one that I could think of is the hydro and vis, paper, because they have run, the initiators of, examining how taxation changes in corporate taxation actually affects that more accounting side, the corporate finance side of firms. So what happens when we have changes in taxation? What happens to their leverage? Okay?

04:28 - But also we have to take into account the traditional more kind of mutation literature, of, stick and how the supply side is formed in terms of the, the loan market. You know, it's this kind of credit rationing traditional, more traditional macro oriented literature that explains what happens with the, the loan supply curve of the firms firms. So for example, if I take you to the traditional demand supply graph

04:54 - that we have a demand, that it has a negative slope as always, but the supply has positive slope. What tickets comes in and says in state and vice and all these kind of, banking, finance and literature, they actually say that the supply of the loans can be also, less elastic. Okay? Or it can even go turn positive because, you know, the idea is that if you go higher interest rates, the people, the firms that they are actually coming in to ask

05:25 - for this credit are people that they're willing to take more risk. Okay? So you exclude all these firms that they don't want really high risk, and the people that they are going in and demand for more higher interest rates, they're more risky. So that makes it also more risky for the bank. This is the idea of the credit ings. So what we do is we more

05:45 - or less bo borrow, we use the dataset that hydro vis use, and that's a dataset about changes in corporate taxation in the states. This is beautiful. Why in the states, Because we have all the, the states, its state has a different level of tax rate in terms of corporate tax rate. This is beautiful because we can isolate different changes. So for example, when we have a change in New York,

06:09 - that change might not happen anywhere else in the us. So we will have a control in treatment group. So that means that we can compare what actually the change means. Again, this is the traditional difference in differences approach. And this is what we exploit the change, the different changes across the states, across the years. So we actually have, data from 1987 until 2015, we use the data on the tax changes.

06:35 - We also have data on bank characteristics throughout all these years. Firm characteristics throughout all these years. But most importantly, we have loan deals, okay? We use the syndicated loan market and we have loan deals. If you think that I, you would like me to go through a bit in the syndicated loan market, it's, a loan that is given by different suppliers to firm, and they're big. These are guy, these are usually big loans, okay?

07:02 - so we have all these years, we have a lot of changes throughout this year. For in particular, we have 49 increases through these years in 27 states, and we also have 98 decreases in 31 states. Okay? So we have a plurality of events and then we go to try to understand how this is affecting credit, credit, how the interest rate that the firms are borrowing and the loan amount more or less.

07:30 - We try to understand single demand, some supply side effects, quantity, price, price in the interest rate of the loan quantity is the loan amount, okay? So that's more or less the, the general framework. And then what we do is in order to understand, so we run the first regression and we try to understand how the changes affect the price of the loan. Okay? now one thing that it is important

07:58 - that it hasn't been sewn before is that hydro nuy are actually the first one that they try to say, you know, tax increases and decreases are not the same. We should not be treating increases and decreases the same way. It's not one event, it's a different event. Okay? So we separate tax increases and tax decreases exactly, because we expect the tax decreases might affect our firms differently and our banks differently than

08:23 - the tax increases. Let me give you an example on that to try to understand how we understand the theory if we have a tax increase, okay? The banks, the profitability of the firms might go down, but the banks might not want to use clients. So may, they might try to absorb this increase, you know? But if we have a tax decrease, that might not be the case because now it's more beneficial. The banks can actually operate in a better way,

08:49 - give out more loans, make more profits, okay? So that means that we have an asymmetry from the supply side. Similar comes from the demand side. So what we do is we exploit these bank characteristics that we have. We exploit the firm characteristics that we have, and we try to understand what happens. So first step is that we run a similar regression that it has different, tax increases

09:13 - and tax decreases separately, okay? On the price of the loans. And what we actually find is that this traditional demand effect that I had in my mind when we started this project, you know, I have a tax, decrease profitability increases, I should demand for more. So what happens then? That means that the price of the loan, since I demand for more, should increase.

09:37 - That doesn't hold, okay? So we don't observe that, okay? So we observe something that is either driven by supply or initially we observe something that depends on the firms. What do I mean? Depends on the firms. If we have small firms, okay? These firms, these guys might be weaker. So when we have a tax decrease, they might be the ones that they jump into, get more credit. But the big guys, the big players in the economy, what they actually do, especially

10:07 - because this is the us okay? And we have to deal with tax seals and all this kind of idea of the debt, the corporate debt, and how these guys structure it, what they might do is because they have now more profits, they can actually find alternative ways to finance new investment. And we observe exactly that. But depending on the firm size, okay, the results are affected.

10:30 - So the debt restructuring effect is actually the most prevalent effect that we find. Okay? We find that when we have a tax decrease of one point, let's assume that we have one point tax decrease and the corporate tax rate, we almost have a decrease of eight basis points in our spreads. What's contrary to our initial bid, we were surprised finding that. then when we control for the supply side, we find that the supply side is not as prevalent.

11:01 - Okay? The demand side, obviously it's out because we should have had like an increase in the industry. So what is left is the debt restructuring effect. This is how we call it. The firms actually restructure the way they organize their debt, and we have several ways to control for that. So we, we play around with the firm size, whether the firms are highly leveraged, whether the firms actually own bonds, they're increasing their bonds,

11:28 - and what we actually find is demand site driven. It's mostly the demand that is affecting, but how these guys affect their demand structure and their debt structure. So that's the number one. And the second that it's especially interesting as well is tax increases are actually irrelevant. So we don't observe a significant effect when we observe tax increases. And when we, Again, control for all these ideas

11:55 - of the firm characteristics and the bank characteristics, we actually find the story that I told you initially. you know, when we have tax increases, the banks do not want to lose their clients, okay? So they absorb the buffer. This, so they don't offer more expensive loans, okay? To maintain their clientele. So tax increases versus tax decreases very, very different results.

12:21 - So we have to take that into account when we make policy implications and the reasons are very, very different. So my key takeaway is, a more general one is that when we have, when we examine taxation, for us, it's important in science to have different events, tax increases and tax decreases are very, very different. We should never have them in the same, bo bo baskets together. Okay? So there are symmetric effects. Second, the theory doesn't always provide the

12:53 - straightforward results theories there, I still obviously, I believe in theory, but there are effects that they're more prevalent when you conduct policy, okay? Because when you conduct policy on the higher level, you might miss how the different agents can react. And different agents are different exactly, because they're different. A a high, a big firm is a different player than a small firm. So they will have a different way to assess the policy,

13:18 - different buffers. so for me, I think the takeaway of that first is that when it comes to our question of the paper is that tax decreases are the important, they provide the important effects in credit, okay? They actually tax decreases, reduce the loan spreads. Okay? Second is that we actually find, strong, results, su supporting steel theory, and all this literature about this in elastic supply because we don't observe this effect of,

13:52 - following the loan amount. So we only have, we mostly observe effects in the loan pricing, but not on the loan amount. Okay? So the results are affecting mostly that suggesting that the loan supply curve is, more in elastic. Okay? And the third I would say is that when we design policy, we have to take into account parameters like exactly that. So more accounting level, I don't want

14:20 - to use the word micro. It's that every agent is different. So each policy might affect every agent in a different way, and we have to take that into account. In this particular case, for example, tax increases, we observe that they're absorbed up to now, okay? We, we only examine obviously, data of the past. Okay? Tax increases are absorbed, absorbed, from the banks because they don't want to lose, clients tax decreases. Okay? Then the,

14:48 - the game starts in the demand side of the firms. Big firms react in a different way than the small firms, depending on their debt, depending on how close they are to their tax yield, depending on, on different factors and, firm characteristics.

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