(Forthcoming, American Economic Journal: Economic Policy)
This study estimates the investment, financing, and payout responses to variation in a firm’s effective corporate income tax rate in the U.S. I exploit quasi-experimental variation created by the Domestic Production Activities Deduction, a corporate tax expenditure created in 2005. A one percentage point reduction in tax rates increases investment by 4.7 percent of installed capital, increases payouts by 0.3 percent of sales, and decreases debt by 5.3 percent of total assets. These estimates suggest that lower corporate tax rates and faster accelerated depreciation each stimulate a similar increase in investment, per dollar in lost revenue.
(Winner, Young Economist Award 2016 IIPF Annual Congress)
Since 2002, the U.S. federal government has relied on two special tax incentives, bonus depreciation and Section 179 expensing, to stimulate business activity. When the federal policies were instituted, many states adopted them. Others did not. Using a modified difference-in-differences framework, this paper estimates the manufacturing sector response to state adoption of the policies. The analysis suggests that both policies significantly increase investment. Employment and total production are also impacted, but only several years after state adoption. The decoupled investment and labor responses suggest that the incentives accelerated the automation of the U.S. manufacturing sector.
As 2012 drew to a close, the U.S. economy was speeding towards the "fiscal cliff," a series of previously enacted laws that would come into effect on January 1 2013, simultaneously increasing taxes while decreasing spending. At the last possible moment, the U.S. Congress averted the crisis by passing the American Taxpayer Relief Act of 2012. In a surprise move, the act extended bonus depreciation, an investment tax incentive that decreases the present value cost of new capital investments. Using a differential effects event study methodology that relies on this surprise extension and industry variation in the generosity of policy, I estimate how much investors value bonus depreciation and tax investment incentives, more generally. Empirical results suggest stock prices increase by 0.5% for firms that benefit most from the extension of the policy. The results are not concentrated among the types of firms that have been shown to be the most responsive to bonus, suggesting investors value the cash flow effects of the policy but not the investment it stimulates.
This paper investigates corporate payout and acquisition decisions accounting for investor-level taxes. We show that managers of dividend-paying firms have an incentive to make additional lower-quality acquisitions instead of paying additional dividends when dividends are taxed more heavily than capital gains. We exploit a quasi-natural experiment created by the Jobs and Growth Tax Relief Reconciliation Act of 2003 that substantially lowered the dividend tax rate. We find that dividend-paying firms performed fewer acquisitions and their post-acquisition performance increased due to the reform. This evidence helps explain corporate payout and acquisition decisions and the observed increase in dividend payments after 2003.
(Revision requested, Journal of Economic Behavior and Organization)
We present novel evidence that corporate charitable foundations are associated with significant distortions in managerial decision-making. Firms with corporate foundations have more entrenched managers than firms without foundations, and foundation firms increased shareholder distributions by less than one half as much as similar firms without foundations following the 2003 capital income tax cut, even after controlling for common explanatory factors such as executive shareholding. The findings are robust to alternative explanations and to common threats to causal identification. Further exploration reveals that our estimates capture a greater reluctance of foundation firms to initiate or rapidly increase shareholder payouts, but not a greater tendency to reduce or eliminate shareholder payouts. These findings imply that corporate charitable foundations are indicative of agency problems within the firm.
While all Intellectual Property (IP) Box regimes provide substantially reduced rates of corporate tax for income derived from IP, boxes can differ significantly in how they define qualifying IP income. Some boxes apply to income derived from IP that existed prior to the box and to IP acquired after the box was implemented, others only to new IP. Additionally, several IP box regimes apply to IP revenue as opposed to IP income (revenue minus costs). This paper tests how U.S. payments to foreign countries for the use of IP and research and development activities of foreign affiliates of U.S. multinational enterprises (MNEs) respond to the implementation of IP Box regimes and IP Box characteristics. The results indicate that U.S payments for the use of IP only increase in response to boxes that apply to income derived from existing or acquired IP. On the other hand, only boxes that either (1) only apply to newly developed R&D or (2) boxes that apply to IP revenue – as opposed to IP income – stimulate U.S. MNE affiliate R&D.