Tax Policy Beliefs and Investment: Evidence from the 2016 U.S. Election and the Tax Cuts and Jobs Act

Abstract

Using a dynamic text-based approach to measuring firms’ tax policy expectations, we show that two tax-changing events—namely, the 2016 U.S. election and the Tax Cuts and Jobs Act (TCJA)—affected these expectations in ways that vary substantially across firms and sometimes run counter to conventional wisdom. We further show that these event-induced tax policy expectations materially shape firm investment both before and in response to the TCJA. Our findings support recent analytical research calling empirical researchers to incorporate expectations when studying firm responses to tax policy. Furthermore, they suggest that tax policy can influence firm behavior through policy expectations.