ECB Study: Local Corporate Tax Hikes in Portugal Squeeze Firm Financing and Cut Sales and Employment

What the ECB published

The European Central Bank released a study on how local corporate tax increases affect firms' financing and real activity. It focuses on Portugal, where municipalities independently set a surtax on corporate income, creating variation across places and over time.

The authors link corporate balance sheets and profit-and-loss statements to loan-level data from the Bank of Portugal's credit registry. This allows them to follow liquidity, leverage, borrowing costs and credit quality alongside revenues, employment and productivity.

Key findings

Surtax hikes tighten financing conditions immediately. Liquidity falls, implicit interest rates rise, debt shifts toward shorter maturities, and non-performing loans become more common.

These strains carry over into the real economy. Firms reduce sales and employment and see lasting declines in total factor productivity. Small firms are affected most, with leverage rising in response to liquidity losses.

The study also finds higher probabilities of firms exiting or relocating, but no gains in output in neighboring areas. The authors read this as inefficient reallocation. They conclude that local tax policy can work through both financial and real channels, with implications for fiscal design in decentralized settings.

Notes for EA trading

Research papers like this one are not scheduled data releases, but broader economic and policy publications can still shift market sentiment. Around major releases, volatility may rise and spreads may widen. Consider whether pausing EAs or reducing activity during those hours suits your own risk management.