What Do We Know About the Effects of the Tax Cuts and Jobs Act?
On December 22, 2017, the U.S. tax code was dramatically changed when what is commonly referred to as the Tax Cuts and Jobs Act (TCJA) was signed into law. As tax scholars, we have a keen interest in knowing how the TCJA will change the world. On this page, we are posting empirical academic studies that focus on specific provisions of this monumental tax reform.
We plan to update this page as more studies come out. Further, many of these studies are early working papers, and have not been vetted by the peer-review process, so check back regularly for updates. While we will add new papers to this page, we will not update these papers as they go through the review process, are updated, published, etc. However, the information on this page should provide enough information for interested readers to track down the most up-to-date version of these papers.
Many of these articles below I have curated on my own, or others have shown to me. However, if you would like to request that we add your study, please email me at hoopes@unc.edu. We are only posting studies that are hosted elsewhere (we prefer they be accessible on SSRN), and that are (1) empirical, (2) academic and (3) focus on the TCJA.
This paper combines administrative tax data and a model of global investment behavior to evaluate the investment and firm valuation effects of the Tax Cuts and Jobs Act (TCJA) of 2017, the largest corporate tax reduction in the history of the United States. We extend the canonical model of Hall and Jorgenson (1967) to a multinational setting in which a firm produces in domestic and international locations. We use the model to characterize and measure four determinants of domestic investment: domestic and foreign marginal tax rates and cost-of-capital subsidies. We estimate elasticities of domestic investment with respect to each and use them to identify the structural parameters of our model, to quantify which parts of the reform mattered most to investment, and to conduct policy counterfactuals. We have five main findings. First, the TCJA caused domestic investment of firms with the mean tax change to increase by roughly 20% relative to firms experiencing no tax change. Second, the TCJA created large incentives for some U.S. multinationals to increase foreign capital, which rose substantially following the law change. Third, domestic investment also increases in response to foreign incentives, indicating complementarity between domestic and foreign capital in production. Fourth, the general equilibrium long-run effects of the TCJA on the domestic and total capital of U.S. firms are around 6% and 9%, respectively. Finally, in our model, the dynamic labor and corporate tax revenue feedback in the first 10 years is less than 2% of baseline corporate revenue, as investment growth causes both higher labor tax revenues from wage growth and offsetting corporate revenue declines from more depreciation deductions. Consequently, the fall in total corporate tax revenue from the tax cut is close to the static effect.
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This paper studies the impacts of limiting interest deductions on firms’ investment and financing choices using U.S. tax data. The 2017 law known as the Tax Cuts and Jobs Act (TCJA) implemented an interest limitation for big, high-interest firms. Using an event study design comparing big and small high-interest firms, we rule out economically significant impacts of the interest limitation on investment and leverage, and find evidence that the interest limitation led firms to increase their equity issuance. A triple difference design that accommodates size-varying impacts of other TCJA policy changes yields similar results, as does a regression discontinuity design focusing on marginal firms that are just large enough to face the interest limitation. Our results indicate many firms do not use debt as their marginal source of financing and provide evidence consistent with capital structure models with fixed leverage adjustment costs. Furthermore, our results suggest limiting interest deductions is unlikely to have large impacts on investment or to address concerns about rising corporate debt levels.
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The 2017 Tax Cut and Jobs Act reduced the US corporate tax rate and introduced provisions to curb profit shifting. We combine survey data, tax data, and firm financial statements to study the evolution of the geographical allocation of US firms’ profits after the reform. The share of profits booked abroad by US multinationals fell 3–5 percentage points, driven by repatriations of intellectual property to the US. The share of foreign profits booked in tax havens remained stable around 50% between 2015 and 2020. Changes in the global allocation of profits are small overall, but some firms responded strongly.
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We take advantage of a 2017 change in tax rules in the U.S. to re-examine whether CEOs are rewarded for luck. We examine the effect of one-off tax gains and losses associated with deferred tax assets and liabilities on CEO compensation around the Tax Cuts and Jobs Act (TCJA) of 2017. Relative to other years, we find that less visible firms compensated their CEOs more for the one-time tax windfall gains during the TCJA-transition period. Further, we find evidence in support of pay asymmetry; CEOs of less visible firms were compensated more for tax windfall gains but were not compensated less for tax windfall losses. The CEO pay associated with the tax windfalls cannot be explained as firms sharing these tax gains with all employees. These results are consistent with rent-extraction by CEOs of less visible firms.
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The Tax Cuts and Jobs Act removed the repatriation tax on the accumulated foreign profits of U.S. firms, effective January 1, 2018. Overnight, this unlocked as much as $1.7 trillion in new liquidity for U.S. multinationals. Using a difference-in-differences approach, we examine the real and financial response to this liquidity shock. We find that firms did not increase capital expenditures, employment, R&D, or M&A in response to the increased access to cheap capital, regardless of financial constraints. On the financial side, firms responded to the increased liquidity by increasing share repurchases and adjusting downward consolidated cash holdings. However, less than one-third of this new liquidity was paid out to shareholders, and half of it was retained as cash. This high retention was not associated with poor governance. Our findings suggest a low sensitivity of financial positions in response to liquidity shocks even among well-governed firms with limited financial constraints.
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The U.S. tax reform in 2017 introduced the Global Intangible Low-Taxed Income (GILTI) tax to discourage U.S. multinational companies (MNCs) from shifting intangible income offshore. The reform simultaneously introduced the Foreign Derived Intangible Income (FDII) tax incentive to encourage companies to locate intangible income derived from export sales in the United States. We examine whether and how these two tax provisions affect the investment decisions of U.S. R&D-intensive MNCs. We find that these MNCs increase foreign tangible investments to minimize their GILTI tax burden but do not appear to decrease domestic tangible investments. To maximize FDII tax benefits, MNCs increase investments in both foreign and domestic human capital. We find MNCs are more likely to increase foreign human capital when they have more cross-border collaboration experience, consistent with the prediction that firms increase foreign R&D to better adapt home-developed technology for foreign markets. We further show that FDII incentivizes MNCs to cultivate a new R&D workforce in the U.S., as opposed to merely recruiting seasoned R&D personnel from other firms. Our findings have timely implications for policymakers to assess the impact of the 2017 tax reform.
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We examine the effect of Internal Revenue Service code (IRC) section 4960 of the Tax Cuts and Jobs Act of 2017 (TCJA) which imposed a 21% excise tax on nonprofit employee compensation over $1 million per covered individual. Using a difference-in-differences analysis on IRS Form 990 data for almost 40 thousand nonprofit employee-year observations from 2015 to 2020, we find a lower growth rate for treated employee compensation post section 4960. Our results are robust to the use of alternative treatment specifications as well as control samples, e.g., employees earning more than $1 million but not covered under section 4960; medical professionals specifically exempt from section 4960. We also find that CEO turnover is higher for treated CEOs post section 4960. Our findings contrast those of prior research on Section 162, the parallel provision which applies to executive compensation in for-profit publicly listed firms, which found no decrease in compensation.
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This study examines the effect of the 2017 Tax Cuts and Jobs Act (TCJA) on capital investment, labor investment, and the productivity of foreign subsidiaries of U.S. multinational corporations (MNCs). Proponents of the TCJA argue it decreased foreign investment by leveling the playing field between U.S. MNCs and foreign-owned corporations. However, policymakers are currently debating international tax reform, arguing that the TCJA incentivizes foreign investment. My study informs this debate by providing empirical evidence on the TCJA’s effect on foreign investment and productivity. Using a difference-in-differences design, I find that after the TCJA, U.S.-owned foreign subsidiaries invest 13.1 percent less in capital and 1.3 percent less in labor relative to subsidiaries owned by non-U.S. MNCs. I also find these reductions are positively associated with subsidiary-level productivity, suggesting that the TCJA alleviates inefficiencies of the previous tax regime.
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This study examines the impact of the Tax Cuts and Jobs Act of 2017 (TCJA) on U.S. corporate investment. We examine U.S. firms and compare them to Canadian firms from 2017 to 2019 in a multivariate firm fixed-effects difference-in-differences analysis. Our results indicate that investment increases for U.S. firms relative to Canadian firms after the tax cuts. We also find that firms with high levels of cash held abroad before the tax cuts and those that shift the most cash back to the U.S. after the tax cuts increase investment the most. Furthermore, we exploit a provision in the TCJA that allows firms to immediately deduct the full cost of assets with lives of less than 20 years by showing that the increase in investment is concentrated among firms with shorter asset lives. Finally, we show that for U.S. based firms, assets increase for their domestic but not their foreign operations. The paper contributes to the literature by providing systematic evidence on the effects of the TCJA which have been debated extensively by politicians, journalists, tax policy experts, and academics.
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This paper analyzes stock market reactions to announcements of cross-border M&A deals before and after the ‘Tax Cuts and Jobs Act of 2017’ (TCJA). Prior literature established that the repatriation tax system resulted in agency conflicts and correspondingly low announcement returns due to excess cross-border acquisitions. The TCJA abolished the repatriation tax. Therefore, M&A decisions by the managers might more closely align with the investors’ perspective post TCJA. Correspondingly, announcement returns could become more positive. However, if managers continue to pursue excess cross-border acquisitions, investors might be particularly dissatisfied because of the alternative option of tax-exempt repatriation post TCJA. In line with excess M&A acquisitions post TCJA, I present evidence that abnormal returns to cross-border M&A announcements by U.S. firms are significantly lower in the period after the TCJA. The effects are concentrated in U.S. acquirers most affected by the repatriation tax prior to the TCJA, in cross-industry deals, and in acquisitions by firms with low leverage and low payout ratios. Overall, my findings suggest that the negative perception of cross-border M&A is driven by agency conflicts not solved by the TCJA.
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The target’s valuation is the cornerstone of merger negotiations and hinges on expectations of after-tax cash flows. But how do buyer and seller adapt when the underlying tax parameters are in flux? Focusing on the months-long legislation process behind major corporate tax reform in 2017 (TCJA) and exploiting hand-collected data on private merger negotiations, we examine in real time the impact of tax reform and its uncertainty on contemporaneous merger negotiations. Acquisition premiums negotiated during tax legislation are increasing in the target’s expected gain from tax reform. Tax legislation events are rapidly followed by new private merger negotiations, especially when the target’s expected tax reform gains are high. For deals negotiated during tax legislation, the magnitude of pre-announcement bid revisions are increasing in the target’s expected gains from the reform and driven by targets with more bargaining power. Our results provide new insight on takeover negotiation responses to material but uncertain tax policy events.
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This paper studies the impact of a place-based tax credit policy, the Opportunity Zone program created under the Tax Cuts and Jobs Act of 2017, on local private investments and entrepreneurship. Using a difference-in-differences approach and comparing census tracts designated as Opportunity Zones and other eligible but non-designated tracts, I find that the policy has drawn significantly more private investments to economically distressed areas. Surprisingly, however, these private investments have led to decreases in local new business registration. The decrease in entrepreneurship was mainly in the non-tradable sector, which is more sensitive to local conditions than the tradable or construction sector. Further robustness tests suggest that the above results are causal. I provide one explanation for the above findings that more private investments went to existing and older firms in Opportunity Zones, discouraging potential entrepreneurs from competing with the better-financed firms locally.
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The 2017 Tax Cuts and Jobs Act (TCJA) sharply reduced effective corporate income tax rates on equity-financed US investment. This paper examines the reform’s impact on US inbound foreign direct investment (FDI) and investment in property, plant and equipment (PPE) by foreign-owned US companies. We first model effective marginal and average tax rates (EMTRs and EATRs) by country, industry, and method of finance, and then use those tax rates to calculate the tax semi-elasticities of inbound FDI and PPE investment. We find that both PPE investment and FDI financed with retained earnings responded positively to the TCJA reform, but FDI financed with new equity or debt did not. In country-level PPE regressions, inclusion of macroeconomic controls renders tax rate coefficients insignificant, suggesting that the increase in PPE investment after TCJA was driven by general economic growth. In regressions of FDI financed with retained earnings, however, tax coefficients were robust to inclusion of macroeconomic controls. As the literature predicts, EATRs have a greater impact on cross-border investment than EMTRs. Country-by-industry regressions showed a larger effect of taxes on PPE investment than aggregate country-level regressions, but industry-level tax rates appear to have no effect on earnings retention.
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A provision of the Tax Cuts and Jobs Act of 2017 offered tax incentives for investing in certain low-income areas in the United States called Opportunity Zones (OZs). The goal of this provision was to spur private investment in OZs in order to improve the economic well-being of their residents. This paper uses a regression discontinuity design to evaluate the impact of OZs on commercial investment and economic activity. Using data on the universe of all significant commercial investments in the United States, we find that OZ selection led to practically no increase in investment in OZs. These findings are supported by additional data from Mastercard that also show no evidence of increased business activity nor consumer spending. Overall, our findings suggest that the impact of OZs on economic improvement has thus far been limited.
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This paper extends a standard general equilibrium framework with a corporate tax code featuring two key elements: tax depreciation policy and the distinction between c-corporations and pass-through businesses. In the model, the stimulative effect of a tax rate cut on c-corporations is smaller when tax depreciation policy is accelerated, and is further diluted in the aggregate by the presence of pass-through entities. Because of a highly accelerated tax depreciation policy and a large share of pass-through activity in 2017, the theory predicts small stimulus, large payouts to shareholders, and a dramatic loss of corporate tax revenues following the Tax Cuts and Jobs Act (TCJA-17). At the same time, because of less accelerated tax depreciation and a lower pass-through share in the early 1960s, the theory predicts sizable stimulus in response to the Kennedy’s corporate tax cuts. The model-implied corporate tax multiplier for Kennedy’s tax cuts is four times higher than for the TCJA-17. These predictions are consistent with novel micro- and macro-level evidence from professional forecasters and publicly available tax returns. The paper also offers analytic insights that clarify how these results relate to the capital taxation literature in macroeconomics.
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How do global minimum taxes affect corporate balance sheets and real activities? I study this question using the introduction of the base erosion and anti-abuse tax (BEAT) on multinational insurance companies operating in the US. I find that the BEAT implementation significantly changed the internal capital allocation of insurers, increased global risk-sharing, and increased product prices in the US. I document three main sets of findings. First, the global minimum tax significantly changed the internal capital allocation of insurance companies and decreased the amount of transfer payments of US insurers to their foreign affiliates by 59%, or $30 billion per year. The changes in allocation were primarily driven by foreign-domiciled insurance groups and insurance groups which used foreign affiliates more extensively prior to the tax reform. Second, the tax increased global risk-sharing, inducing insurers to diversify more risk with external counterparties. Revealed-preference estimates suggest that the total increase in risk-sharing is worth $1.9 billion per year for insurers, equal to 2.9% of insurers’ total net income. Third, insurance companies affected by the minimum tax increased policy prices by 1.03% relative to not-affected insurers.
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The US Tax Cuts and Jobs Act (TCJA) led to a drastic reduction in the corporate tax and improved the treatment of C corporations compared to S corporations. We study the differential effect of the TCJA on these types of corporations using key economic variables of US banks, such as the number of employees, average salaries and benefits, profit/loss before taxes, and net income. Our analysis suggests that the TCJA increased the net-of-tax profits of C corporation banks compared to S corporations and, to a lesser extent, their pre-tax profits. At the same time, the reform triggered no significantly differential effect on the employment and average wages.
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This paper examines the effects of the 2017 U.S. tax reform, commonly known as the ‘Tax Cuts and Jobs Act’ [TCJA] on cross-border M&As of U.S. acquirers. The TCJA replaced the U.S. worldwide tax system by a territorial system, albeit with one important exception: the ‘Global Intangible Low-Taxed Income’ [GILTI] provision. Our results suggest that the outbound acquisition pattern changed significantly for those U.S. acquirers that are affected by the new GILTI provision. GILTI-affected firms acquire targets in low-tax countries and tax havens significantly less often after the TCJA. We also provide weak evidence that U.S. firms not affected by the GILTI regime acquire more often targets in low-tax countries and tax havens.
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We find U.S. multinational corporations (MNCs) responded to the Tax Cuts and Jobs Act (TCJA) of 2017 by increasing income shifted to foreign sources in the first two years following the effective date. Financially constrained MNCs increased income shifting more, while higher operational uncertainty MNCs increased income shifting less than other MNCs. Moreover, MNCs likely to be subject to the base erosion and anti-abuse tax (BEAT) increased income shifting less than other MNCs, while firms having a global intangible low-taxed income (GILTI) inclusion are not discouraged from shifting income. MNCs that increase income shifting the most disclose less information about their GILTI liabilities. Our findings suggest that the GILTI provisions are not effective in curbing income shifting to foreign jurisdictions and that proposals such as the Global Minimum Tax are also unlikely to be effective if the rate is lower than the home country corporate income tax rate.
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Despite extensive efforts, the relation between tax incentives and corporate capital structure is an open question. The 2017 US tax reform creates an opportunity to directly estimate this relation. The reform limits the tax advantage of debt for all firms except for small businesses with average sales below $25 million. I use the exception threshold in a regression discontinuity design and show that corporate debt declines nearly dollar for dollar as the present value of the tax benefits of debt shrinks. Treated firms do not raise equity to replace debt, and they decrease investments and hiring, consistent with a rise in the cost of external financing. Confirming the tax channel, treatment effects are stronger in firms with more profits and smaller non-debt tax shields. Comparing the size of the debt tax shield across the firm size distribution suggests that the estimates likely provide a lower bound for the effects in large corporations.
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We use electronically-filed federal tax records from tax year 2019 to document the first available evidence on the short-run response of financial capital to the Opportunity Zone (OZ) program, a federal place-based policy that provides tax incentives for capital investments in more than 8,000 low-income neighborhoods across the United States. We observe $18.9 billion of aggregate OZ investments from electronic filers in tax year 2019. While these data do not yet incorporate paper filers, several suggestive patterns emerge. First, OZ capital appears highly spatially concentrated: 84% of designated Opportunity Zone tracts in our sample receive zero OZ investment, and among those that do receive investment, the distribution is highly skewed. Second, we correlate OZ capital with tract-level demographic characteristics and show that, although tracts that receive investment are disadvantaged relative to the general US population, they appear well-off relative to other OZ tracts that do not receive investment. Among OZ tracts, investors report equity and property investments in neighborhoods with relatively higher incomes, home values, educational attainment, and pre-existing income and population growth. These tracts have also experienced significant changes in their demographic composition over the past decade. Finally, we geocode the universe of individual and business tax records to construct novel tract-level measures of wages, employment, commuting, firm growth, and real investment that we plan to use to evaluate the causal effect of the OZ tax subsidies as more comprehensive data become available. We demonstrate that these estimates closely match corresponding measures from publicly available Census data. We explicitly discuss limitations of the data, and will update this working paper as more comprehensive data become available.
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The Tax Cuts and Jobs Act of 2017 (TCJA) reduces U.S. multinational companies’ (MNC) internal capital market frictions related to repatriation costs by decreasing costs to access internal capital (i.e., foreign cash). This study examines MNCs’ responses to the TCJA and finds spending and investment behavior are dependent upon liquidity, investment opportunities, and borrowing costs. Domestic capital expenditures increased for MNCs with low domestic liquidity and high domestic investment opportunities. These firms also increased share repurchases. In contrast, MNCs with low domestic liquidity and low domestic investment opportunities increased dividends. MNCs with low domestic investment opportunities and high cost of debt reduced their outstanding debt. We also investigate responses to global intangible low-taxed income (GILTI) incentives and find that MNCs with more foreign cash and a greater likelihood of being affected by the GILTI regime increase their foreign but not domestic capital expenditures - a potential unintended consequence of TCJA.
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We consider the short-run responses of businesses and their owners to the introduction of Section 199A, a deduction implemented in 2018 that reduced the effective tax rate on pass-through business income. We study the deduction using several datasets derived from de-identified tax records of individuals and businesses. Overall, we do not find an increase in 2018 in business income likely to be eligible for the deduction, either in the time series or among firms with greater exposure to the deduction due to plausibly exogenous characteristics. We additionally examine specific hypothesized margins of adjustment. We find that partnerships (one type of pass-through business) reduce compensation paid to owners, in line with the incentives created by 199A, but that S corporations (another type of pass-through business) mostly do not. Additionally, we do not find that workers – whether new hires or current employees – switch from employee to contractor status to claim the new deduction. Finally, we find no evidence of changes in real economic activity as measured by physical investment, wages to non-owners, or employment of nonowners, though this analysis is underpowered in the short-run.
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Authors estimate the market anticipated the probability of TCJA passage to be as high as 95% 30 days before the event. The full value impact of the TCJA is found to be 12.36%, compared to 0.68% when market anticipation is ignored.
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Corporate defined-benefit (DB) pension sponsors in the US are increasingly on a path of “derisking” – by moving pension assets away from equities and towards fixed-income securities that better match the obligations, or by transferring obligations off their balance sheets entirely, via settlements with insurance companies or lump-sum payouts to beneficiaries. In this study, we examine whether the Tax Cut and Jobs Act of 2017 (“TCJA”) served as a driver of pension derisking. Examining behavior in the window between the TCJA’s announcement and its lower tax rate going into effect, we document that sponsors with stronger incentives to derisk their pensions tend to contribute more into their plans in that window, while deductions can still be taken at the higher tax rate – specifically, sponsors expecting large and uncertain contribution requirements for pensions in the future, facing high regulatory costs to maintaining plans, and with competing demands on cash flows. Examining behavior after the TCJA goes into effect, we document that the firms with the largest TCJA-triggered contributions also engage in more derisking subsequently, both by shifting asset allocations and by transferring obligations to other parties. In sum, our findings point to the TCJA having acted as a trigger for what could be a fundamental reorganization of the DB pension landscape in the US.
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Approximately 60 public companies announced they would share cash windfalls from the Tax Cuts and Jobs Act (TCJA) with rank-and-file employees through bonuses, higher wages, or increased benefits. We use employee survey data from Culture X to examine how the announcement of these TCJA bonuses affected employee pay satisfaction. Although employees are economically better off upon receiving these bonuses, prior literature suggests employee pay satisfaction could decrease if employees perceive the bonuses to be unfairly small. Using a difference-in-difference design, we find a greater decline in pay satisfaction among employees at firms announcing a TCJA bonus versus those that do not. Consistent with dissatisfaction about unfairly small bonuses, we document a larger decline in pay satisfaction at announcing firms with larger increases in CEO bonuses and larger share repurchases around the TCJA. Our results provide new insights into how workers respond to changes in compensation stemming from corporate tax savings.
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This study examines whether multinational corporations (MNCs) reclassify related-party payments to avoid the new base erosion and anti-abuse tax (BEAT). The Tax Cuts & Jobs Act of 2017 included the BEAT to combat income shifting from the U.S. to foreign entities. An exclusion in the tax law provides MNCs an incentive to reclassify related-party payments as cost of goods sold. We use a triple-difference design that leverages the BEAT filing threshold of $500 million in revenue and the parent company’s location to document increases in the unconsolidated sales of foreign subsidiaries of MNCs subject to BEAT relative foreign subsidiaries of MNCs not subject to BEAT consistent with cost reclassification. We also find this effect is strongest in MNCs with more related-party payments. Overall, our results imply that firms use the subjectivity inherent in cost classification to reclassify costs as cost of goods sold to avoid the BEAT.
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We examine the impact of changes in the federal tax treatment of owner-occupied housing stemming from the implementation of the Tax Cuts and Jobs Act (TCJA) in January 2018 on local housing markets. Using county-level house price information and IRS tax data, we find that, holding everything else the same, capping the federal tax deduction of state and local taxes at $10,000 has caused the growth rate of home value to decline by an annualized 0.9 percentage point, or 18 percent, in areas where real estate taxes as shares of taxable income exceeded the national median. The results are robust when controlling for other changes in the tax reform. The areas with a high real estate tax burden also suffered from reductions in market liquidity after the reform. Fewer houses were transacted either in absolute numbers or as shares of total listings and houses stayed on the market longer before being sold. Importantly, we find that the housing market slowdown was accompanied by declines in local construction employment growth as well as multi-family building permits. Furthermore, on net more people moved out of these areas after the reform. Finally, we show that the act has already had political consequences. In the 2018 midterm Senate elections, more voters voted for Democratic candidates in areas with high real estate tax burden than they did for Republican candidates.
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As part of the most sweeping federal tax reform in a generation, the Tax Cuts and Jobs Act (“TCJA”) radically altered the tax treatment of compensation paid to senior executives of public companies. Prior to the TCJA, payment of such compensation in excess of one million dollars was non-deductible except to the extent the compensation was performance-based. The TCJA eliminated the exception so that all senior executive compensation above one million dollars is now non-deductible regardless of whether it is performance-based or not. This reform provides a natural experiment to study the role of tax law in influencing managerial pay decisions, an issue that has been debated for decades by scholars and policymakers. Did the elimination of the performance-based pay exception influence senior executive compensation decisions? Using a novel empirical design, we find no evidence that the repeal of the performance-based pay exception changed the most significant and salient compensation features, namely the proportion of performance-based pay to total pay and the overall amount of pay. On the other hand, when we move from headline compensation features to smaller technical ones, our data suggests that the tax change has had a significant influence. This suggests that tax rules may be only consequential in shaping executive compensation when no one else is paying attention otherwise.
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Conventional wisdom suggests that the promise of tax legislation played an important and positive role in the 25% increase in the stock market that began on November 9, 2016 and continued through December 22, 2017 (the day TCJA was signed into law). Our comprehensive and exhaustive forensic analysis confirms its positive effect. With that said, we find that its net impact is relatively modest. To come to this conclusion, we first construct a novel daily human-based attribution by carefully reading the news on each of the 283 days. This exercise shows the 52 days in which tax-related news was important make up less than 1% of the total observed return. We attribute large gains to tax-related news immediately after the election as well as the build-up to passage in late 2017. However, key events in the summer of 2017 decreased the prospects for tax legislation, which wiped out most of the gains that we attributed to tax policy over the full sample. This "up, down, and up again" narrative is corroborated across a wide-range of alternative approaches, including (1) a machine-driven textual analysis based on over 1,500 possible specifications, (2) a novel probability measure tied to the passage of tax legislation constructed from prediction markets, (3) the relative performance of high tax firms compared to low tax firms, (4) a daily attribution based on firm-level regressions, and (5) several macroeconomic financial indicators. The relatively modest estimated effects are consistent with the market potentially being more driven by strong global growth, changes in other policies, a weaker dollar (which coincided with a reduction in the likelihood of passage of tax legislation), and numerous below-expectations inflation prints (keeping monetary policy at bay) that fortuitously occurred over this time period.
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We analyze the initial corporate response to the 2017 enactment of the “Tax Cuts and Jobs Act” or TCJA. TCJA changed many corporate tax provisions, including a reduction of the corporate statutory tax rate from 35 percent to 21 percent effective in 2018 and sweeping changes to the taxation of income earned abroad by U.S. corporations. Based on a sample of U.S. corporate tax returns, we find that corporations accelerated deductions into 2017 and delayed income into 2018, thereby minimizing their taxes. We estimate an income and deduction shifting tax elasticity of -0.11 and 0.08, respectively. Additionally, we study detailed tax returns of 81 large corporations to understand how those changes impacted them.
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This paper examines earnings management around the reduction in the corporate tax rate from 35% to 21% as enacted by the ‘Tax Cuts and Jobs Act’ (TCJA) of 2017. Building on a theoretical model that considers a higher level of book-tax conformity of ‘real earnings management’ (REM) in relation to ‘accrual-based earnings management’ (AEM), we hypothesize that firms concertedly use these manipulation techniques for different purposes. Specifically, we predict and find that firms engage in REM to shift income from the high-tax period prior to the TCJA to the low-tax period after of the TCJA to realize tax benefits. In contrast, we predict and find that firms use AEM, which has a lower degree of book-tax conformity, to simultaneously increase book income. Consistent with intertemporal income shifting, we also find that these effects reverse in 2018. Overall, our results document a potential unintended consequence of the TCJA on firm behavior that should be useful to policymakers, regulators, and researchers to evaluate the largest tax reform since 1986.
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The Tax Cuts and Jobs Act of 2017 (TCJA) introduced two major changes that may influence the structure of executive compensation: (1) reducing corporate tax rates from 35 to 21 percent and (2) eliminating the performance-based pay exception in Section 162(m). These changes provide incentives to maximize deductible compensation expense in 2017, before the TCJA goes into effect. Therefore, we predict performance-based compensation to increase more in 2017 relative to prior years. Consistent with our expectation, we find that the increase in CEO bonus and stock option compensation is significantly greater in 2017. Our difference-in-difference results are consistent with the tax rate reduction driving the bonus increase and the repeal of the performance-based exception leading to the increase in CEO stock options. The TCJA also changed the definition of covered employees to include the CFO. We find weak evidence for abnormal increases in CFO performance-based compensation. Additional analyses indicate firms facing stronger tax incentives drive our results. Overall, our findings suggest that firms’ responded to the TCJA in the period before it was effective.
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In 2017, Congress introduced the Opportunity Zone (``OZ'') designation to promote development in distressed communities. A criticized feature of the program is that state governors select zones from many eligible tracts without meaningful scrutiny. We find that while governors are more likely to select tracts with higher distress levels and tracts on an upward economic trajectory, favoritism seems to play an important role in governor decisions. OZ designation is more likely for tracts in counties that supported the governor in the election and when executives or firms with an economic interest in the tract donated to the governor's campaign.
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I examine a presumably unintended consequence of the recent tax reform (Tax Cuts and Jobs Act or TCJA) for executives’ incentive compensation. Specifically, one often overlooked provision of the tax reform is that it removed the requirement that bonus plans be tied to objective financial performance measures for the bonus to be tax deductible. A potential consequence of this removal is that firms may begin to rely more heavily on nonfinancial performance measures in their bonus arrangements. I find an increase, post-TCJA, in both the number of and the weight applied to nonfinancial performance measures. Next, I investigate the implications of these changes. I find evidence of an increase in both investor and information uncertainty for firms increasing their use of nonfinancial performance metrics following the TCJA. I also examine whether the increase in nonfinancial metrics leads to improvements in sustainability outputs (actions aimed at environmental, social, and governance activities) and find evidence of a positive relation. Overall, the results suggest that the recent tax reform facilitated the inclusion of additional nonfinancial performance measures in executive bonus plans. Although the increased use of these metrics is associated with greater investor and information uncertainty, the changes appear to have also led to immediate improvements in sustainability performance.
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We study the effect of Opportunity Zones (OZs) on employment outcomes. We match zip codes with OZs to a control group of similar zip codes that do not have any OZs, and compare job postings and posted salaries across these two groups over time. We find that zip codes with OZs have fewer job postings but higher posted salaries, though both effects are very small in magnitude. We explore further the extent to which the results are driven by particular OZs. About 8700 census tracts were designated as OZs in 2018, yet it appears that only a few hundred have received investments. Those OZs for which we are able to gather data on investments are among the most economically attractive in that they already had more job postings and job growth prior to their OZ designation. When we redo our analysis on the smaller set of OZs with investment we again find fewer job postings and higher posted salaries, but the magnitudes are slightly higher than on the full matched sample.
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The Tax Cuts and Jobs Act of 2017 established a new program called “Opportunity Zones” that created tax advantages for investment locating in Census tracts with relatively low income or high poverty. Importantly, only 25% of eligible tracts in each state could be designated as an Opportunity Zone. We use detailed establishment-level data and a difference-in-difference (DiD) approach to identify the designation of a tract as an Opportunity Zone on job creation. We find the Opportunity Zone designation increased employment growth relative to comparable tracts by a statistically significant 2-4 percentage points over the 2017-2019 period. This result holds for many different industries and for a variety of skill levels.
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We quantify the net effect of recent U.S. tax reform on the tax rates of public U.S. corporations and find they decreased by 7.5 to 11.4 percentage points on average following tax reform. Further, we separately examine the effect of tax reform on purely domestic firms and multinational firms because some key provisions only affect multinational firms. We find both sets of firms benefited from tax reform, although domestics benefited the most. We also find the entirety of multinational tax savings stemmed from tax savings on their domestic operations, not as a result of more favorable taxation of international income. We also find no changes in the federal tax burden on foreign income for firms most likely to be subject to the new anti-abuse provisions. Overall, our findings suggest that despite the recent overhaul in international taxation, the federal tax burden on the foreign earnings of U.S. corporations appears to have been largely unaffected.
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The Tax Cut and Jobs Act (TCJA) slashed corporations’ median effective tax rates from 31.7% to 20.8%. Nevertheless, 15% of firms experienced an increase. One fifth of firms recorded nonrecurring tax costs or benefits exceeding 3% of total assets. Proxies that existing studies employ to assess the TCJA’s impacts account for just half of actual impacts. Stock prices impounded those proxies during the legislative process. Total impacts were impounded the following year, once firms published their financials. These results indicate that investors find it hard to predict even large and immediate changes to company cash flows due to unfamiliar events.
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The Tax Cuts and Jobs Act of 2017 (TCJA) eliminated disincentives for U.S. multinational corporations (MNCs) to repatriate foreign subsidiaries’ earnings, but the TCJA included additional provisions that will impact U.S. firms’ acquisition decisions. We find that both the likelihood and number of domestic and foreign acquisition announcements made by U.S. firms decreased on average after the TCJA but increased with repatriation taxes that U.S. MNCs faced prior to the TCJA. This effect is stronger for those MNCs that held larger amounts of foreign cash prior to the TCJA. The post-TCJA increase in foreign target acquisitions is driven by MNCs that are more likely to be subject to the global intangible low-tax income (GILTI) provisions after the TCJA. Our results suggest that the GILTI provisions introduced a contradictory incentive for U.S. MNCs with higher returns from intangible assets to investment in foreign target firms with lower returns on tangible property.
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This study examines the quality of analysts’ GAAP-based earnings forecasts. Ideally, addressing this question requires events that have an ex ante estimable earnings impact, and affect GAAP earnings but not street earnings. The deferred tax adjustment as a result of a 2017 tax law change meets these criteria. Focusing on the fourth quarter of 2017 (2017Q4), we find that analysts’ GAAP earnings forecasts and revisions fail to incorporate the vast majority of the deferred tax adjustment. We explore two potential explanations for this finding – task-specific complexity and lack of GAAP earnings forecasting effort. We find evidence consistent with the latter. Our final analyses consider two implications of our findings. First, despite analysts underreacting to the deferred tax adjustment, investors promptly impound the adjustment into stock prices at the legislative enactment date, indicating that analysts’ GAAP earnings forecasts are not a good proxy for investor expectations of GAAP earnings during our sample period. Second, analysts who best incorporate the adjustment into their 2017Q4 GAAP earnings forecasts issue more accurate GAAP earnings forecasts for subsequent quarters, indicating that our inferences extend beyond a single quarter and account. Collectively, these findings have implications for research that relies on analysts’ GAAP earnings forecasts to be of reasonable quality.
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The Tax Cuts and Jobs Act (TCJA) of 2017 is the most significant tax reform that the U.S. has experienced in decades, thereby changing incentives for many significant corporate investment decisions. We emphasize the key tax reform provisions altering incentives for outbound investment and examine changing patterns in outbound acquisitions of U.S. firms before and after the TCJA. We find a decreased probability that a foreign target is acquired by a U.S. firm after the TCJA, particularly those that hold IP or are located in low-tax or low-growth markets. We also find a decreased probability that a U.S. firm with untaxed foreign earnings closes a foreign M&A deal after the TCJA, but an increased probability if the firm had no significant foreign presence prior to the TCJA. Taken together our results suggest that the TCJA was largely effective in reducing tax distortions to outbound M&A activity.
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We study the stock market reactions to the Tax Cuts and Jobs Act (TCJA), the most significant structural U.S. tax reform in over 30 years. In line with the stated intent of TCJA proponents, we find that the Act benefited highly taxed firms. However, the Act hindered firms with international operations as well as firms with high interest expense and tax losses. Counter to claims that the TCJA would quickly spur economic growth, we find that financially constrained and high growth opportunity firms did not benefit. Rather, market participants anticipate that most of the TCJA’s benefits will be passed on to shareholders via higher corporate payouts. We confirm these market expectations by documenting that firms did increase payouts via repurchases after the TCJA, but did not increase their corporate investments.
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Income shifting is a significant concern among policymakers worldwide and a growing area of academic interest. We use the shadow insurance setting to study the interplay between tax and nontax incentives in income shifting. Shadow insurance involves intercompany transactions ostensibly designed to help firms meet regulatory capital requirements. We argue that prior to the Tax Cuts and Jobs Act of 2017 (TCJA), foreign owned life insurance firms could use it to shift their U.S. profits to tax havens and save taxes. We find that although nontax incentives appear to be the dominant factor behind firms’ use of shadow insurance, tax considerations also played a significant role for certain firms. While our results suggest that taxes provided an important incentive for foreign owned life insurance firms to use shadow insurance, our study also highlights that, in this setting, nontax considerations appear to motivate U.S. owned firms’ use of tax havens.
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This study examines when and how tax reform impacts the pricing of IPOs. Using the Tax Cuts and Jobs Act of 2017 (TCJA), we examine IPO pricing during the periods of anticipated and post-tax reform. First, we document that firms completing an IPO following the passage of the TCJA experience an increase in valuation. The increase in valuation is significantly lower for firms with net deferred tax assets and U.S. based multinational firms, consistent with those firms benefiting less from the reform. Second, we fail to document an increase in valuation for firms completing their IPO during the period of anticipated tax reform. We further observe that firms did not experience an increased probability of an upward pricing revision during the book-building process during this period, suggesting that the IPO market was unwilling to impound the benefits of anticipated tax reform into offer prices until enactment. This result contrasts with research on the pricing of tax reform for existing publicly traded stock, where prices impound the anticipated benefits from tax reform, far in advance of enactment.
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We document that corporate pension contributions respond to tax-based incentives using the 2017 Tax Cut & Jobs Act (TCJA) as a natural experiment. The TCJA cut the U.S. federal corporate tax rate, temporarily increasing contribution incentives for sponsors of defined-benefit retirement plans. We exploit cross-sectional variation in ex-ante exposure to these incentives. We find that the tax break induced an extra $3 billion of sponsor contributions to medium- and large-scale plans in 2017. But we also find strong evidence of a reversal, both in terms of sponsor contributions and plan funding ratios by 2018. We find no evidence of impact on plan asset allocations. Our results suggest that the TCJA did not have a long-lasting impact on corporate defined-benefit pension funds.
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We examine the role of political affiliation during the selection of Opportunity Zones, a place-based tax incentive enacted by the Tax Cuts and Jobs Act of 2017. We find governors are on average 7.6% more likely to select a census tract as an Opportunity Zone when the tract’s state representative is a member of the governor’s political party. Further, we find that this effect ranges from 0.0% to 26.4% based on the state-level processes governors used to select Opportunity Zones, such as engagement of professional advisors and implementation of public comment procedures. These effects are incremental to important demographic factors that also increased the likelihood of selection, such as lower income levels and improving local conditions. These results provide evidence relevant for current Congressional legislative proposals by informing the extent to which state-level politics and processes affected the implementation of this incentive.
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I study whether trapped foreign cash levels and investor type explain variation in US-based multinationals’ payout policy responses to tax-repatriation-driven cash windfalls. To do so, I use the deemed mandatory repatriation of trapped foreign cash included in the 2017 Tax Cuts and Jobs Act (TCJA). I find my measure of the level of “unlocked” trapped foreign cash (UTC) is related to increases in repurchases and dividends observed post-TCJA. Motivated by prior research, I examine whether this increase in payout varies with institutional investor type: transient, dedicated, and quasi-indexers (Bushee 2001). I find that firms with high UTC and low (high) dedicated ownership see an increase (no change) in repurchases post-TCJA. I do not observe similar variation with investor type for dividends.
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The Tax Cuts and Jobs Act (TCJA) expanded the impact of IRC Section 162(m) by disallowing deductions for any compensation over $1 million paid to top executives. Under prior law qualified performance-based pay was exempt from the $1 million cap. We examine whether TCJA affected compensation decisions in the first year following enactment.
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We study the effects of the 2017 Tax Cuts and Jobs Act (TCJA) on repurchases, leverage and investment. The TCJA generatestax windfalls through a repatriation tax cut and a corporate income tax cut.
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In December 2017, the U.S. Congress passed into law the Opportunity Zone (OZ) program, offering significant tax benefits for property investments in designated low-income census tracts.
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We exploit a December 22, 2017 law change to examine the relation between corporate taxes and executive compensation.
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Using a difference-in-differences design, we show that new limitations on the deductibility of interest, enacted as part of the Tax Cuts & Jobs Act of 2017 (TCJA), significantly decrease corporate leverage.
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The Tax Cuts and Jobs Act of 2017 (TCJA) imposes a mandatory repatriation tax on multinational firms’ unremitted foreign earnings.
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We study foreign externalities of U.S. tax reform. Specifically, we examine foreign firms’ stock returns around key tax reform events.
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We provide evidence of the final, immediate financial statement impact of some of the major provisions of the 2017 U.S. tax law changes, commonly referred to as the Tax Cuts and Jobs Act (TCJA).
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Following two decades of discussion, the border adjustment tax briefly emerged as part of proposed U.S. corporate tax reform in early 2017.
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