Corporate Tax Cuts Research Articles

Falling Short: The Unintended Consequences of the Corporate Tax Cuts

In late 2017, Congress passed the Tax Cuts and Jobs Act (“TCJA”)—the most comprehensive restructuring of the Tax Code in decades. The TCJA impacted both individuals and businesses, domestically and internationally. The TCJA was intended to boost the U.S. economy by encouraging corporate investment in a revenue-neutral way. Although the new provisions initially seemed promising, the TCJA has fallen short of its goals. This article focuses on the unintended consequences of the TCJA as it pertains to corporate behavior and the overall impact on the U.S. economy. Years after enactment, it is apparent that the changes to the Code allowed for more loopholes, further complicated an already complex tax system, provided a windfall to corporations and their shareholders, and contributed to an already significant U.S. budget deficit. Finally, this article previews potential changes to the Tax Code under the Biden administration and recommends specific reforms.

Do Large Corporate Tax Cuts Boost Wages? Evidence from Ohio

Abstract This paper evaluates a natural experiment which occurred in Ohio in 2005 when the state amended the tax system. The change sets up a dramatic corporate tax cut of 8.3 percentage points (p.p.) over the period 2006–2010 corresponding to a 96.9% reduction in the tax. Policymakers also reduced the personal income tax over the same period by 0.95 percentage point (p.p.). I investigate the incidence of the reform on wages in general and corporate wages in the short-run. To do so, I use a synthetic control method along with an event study design applied to individual records of the Current Population Survey (CPS). The results in this paper suggest that the corporate tax cut may have resulted in a one-time payment in corporate wages at the onset of the reform.

The awkward truth about CEO pay

ABSTRACT This paper is the first of its kind using the variation in state corporate tax rates to investigate if they have any explanatory power in predicting variations in CEO pay. Specifically, this paper allows us to shed light on whether corporate tax cuts boost CEO pay? This paper, by using a difference-in-difference (DID) set up over the period 1994 to 2015, finds that corporate tax cuts statistically affect CEO pay among all publicly traded firms in the US. The magnitude of the effect increases among the S&P 500 and S&P 100. The paper further presents some interesting findings using three different measures of executive compensation.

Corporate Tax Cuts for Small Firms: What Do Firms Do?

What do small firms do when given an income tax cut? We address this question by examining the consequences of a sharp reduction in the corporate income tax rate for small- and micro-profit enterprises (SMPE) in China based on confidential tax returns. Utilizing the gradual increases in the qualifying threshold for SMPEs during 2010-2016, we find that newly qualified SMPEs with positive taxable income increased investment, interest expense and productivity. SMPEs in taxable losses did not respond to the tax cut. The tax cut induced more SMPEs to register, especially those in financially constrained sectors. Despite these positive effects, firms’ fixed asset growth slows down when they get closer to the SMPE threshold. Our study contributes to understanding the effect of tax preferences for small businesses.

Corporate Tax Cuts for Small Firms: What Do Firms Do?

What do small firms do when given an income tax cut? We address this question by examining the consequences of a sharp reduction in the corporate income tax rate for small- and micro-profit enterprises (SMPE) in China based on confidential tax returns. Utilizing the gradual increases in the qualifying threshold for SMPEs during 2010-2016, we find that newly qualified SMPEs with positive taxable income increased investment, interest expense and productivity. SMPEs in taxable losses did not respond to the tax cut. The tax cut induced more SMPEs to register, especially those in financially constrained sectors. Despite these positive effects, firms’ fixed asset growth slows down when they get closer to the SMPE threshold. Our study contributes to understanding the effect of tax preferences for small businesses.

Output, Employment, and Price Effects of U.S. Narrative Tax Changes: A Factor-Augmented Vector Autoregression Approach

This paper examines the short- and long-run effects of U.S. federal personal income and corporate income tax cuts on a wide array of economic policy variables in a data-rich environment. Using a panel of U.S. macroeconomic data set, made up of 132 quarterly macroeconomic series for 1959-2018, the study estimates factor-augmented vector autoregression (FAVARs) models where an extended narrative tax changes dataset combined with unobserved factors. The narrative approach classifies if tax changes are exogenous or endogenous. This paper identifies narrative tax shocks in the vector autoregression model using the sign restrictions with Uhlig's (2005) penalty function. Empirical findings show a significant expansionary effect of tax cuts on the macroeconomic variables. Cuts in personal and corporate income taxes cause a rise in output, investment, employment, and consumption; however, cuts in personal taxes appear to be a more effective fiscal policy tool than the cut in corporate income taxes. Real GDP, employment, investment, and industrial production increase significantly and reach their maximum response values two years after personal income tax cuts. The effects of corporate tax cuts have relatively smaller effects on output and consumption but show immediate and higher effects on fixed investment and price levels.

Who Benefits from State Corporate Tax Cuts? A Local Labor Markets Approach with Heterogeneous Firms: Comment

Suarez Serrato and Zidar (2016) identify state corporate tax incidence in a spatial equilibrium model with imperfectly mobile firms. Their identification argument rests on comparative-statics omitting a channel implied by their model: the link between common determinants of a location's attractiveness and the average idiosyncratic productivity of firms choosing that location. This compositional margin causes the labor demand elasticity to be independent from the product demand elasticity, impeding the identification of incidence from the four estimated reduced-form effects. Assigning consensual values to the unidentified parameters, we find that the incidence share born by firm-owners is closer to 25% than 40%.

가족친화인증기업의 인센티브 활용 실태 및 인센티브 수요 분석

This study aims to improve the family friendly certification system by analyzing the actual experience of family friendly certified companies with the certification’s incentives and their demand for new incentives. We analyzed 2018 survey data of family friendly certified company incentives and interviewed representatives from 9 family friendly certified companies. First, the use of incentives differs according to the level of corporate classification, number of employees, industry, certification continuation training, and incentive impact. Current family friendly certification incentives indicate that the utilization rate of incentives is high when small and medium sized enterprises (SMEs) with less than 300 employees have newly received family friendly certification. Second, the use of the certification mark significantly differs by industry, certification duration, and incentive impact. Interviews with the companies’ family friendly certification managers revealed that the incentives that companies use mainly are the Public Procurement Service bid points and priority immigration service. Large corporations hope for strong incentives, such as the National Tax Service’s deferred tax investigation, interest rate cuts for bank loans, and corporate tax cuts. Lastly, the family friendly certification mark is a representative incentive used by 60% of family friendly certified companies. For the qualitative growth and stabilization of the family friendly certification system, the family friendly certification mark should be improved to become a more attractive incentive.

How Governments Respond to Business Demands for Tax Cuts: A Study of Corporate and Inheritance Tax Reforms in Austria and Sweden

How responsive are democratic governments to business demands for tax cuts? We research this question in comparative case studies of cuts in corporate taxes and inheritance taxes in Austria and Sweden. We find that governments, regardless of partisan composition, are responsive to business demands, but that fiscal and electoral goals attenuate responsiveness. In both countries, the limited revenues generated by inheritance taxation and greater alignment of business demands with middle‐class voter interests resulted in governments heading business demands for an abolition of this tax. Goal conflict were larger for corporate tax cuts. In both countries, governments tried to minimize these goal conflict by adopting compensatory policy measures, specifically measures to broaden the tax base and simultaneous tax cuts for low‐income groups. The findings suggest that the policy output of business‐friendly tax cuts reflect a balancing of conflicting goals, rather than outright business dominance.

Corporate Tax Cuts and Fiscal Slippage

The Union Finance Minister on 20 September 2019 announced the highest corporate tax rate cuts in the last 28 years as a level-playing field for both the existing and green-field firms for turning around the sluggish economy. The stimulus package, notwithstanding, has likely to accelerate the demand in the short run, but to increase the fiscal deficit inasmuch, the government would increase its spending through borrowings, which could lead to fiscal slippage. Instead of excessive dependence on the fiscal measures, the government should initiate economic and judicial reforms for accelerating the growth and improving doing business in the country.

Statutory corporate tax change and the stock market returns: the global experience

ABSTRACT This study offers a global perspective on the relationship between statutory corporate tax changes and country equity index returns for 54 countries for 2002–2017. Using fixed-effect models for country-effect to account for possible omitted country characteristics, we report higher world-adjusted buy and hold abnormal returns (BHARs) for the country-years with higher corporate tax cuts. Noticeably, we document this outcome for not only the year before the actual tax change but also the year afterwards, indicating that investors might not fully or quickly integrate tax change information. The results hold after excluding the 2008 global financial crisis. Dividing the sample based on market development, we report similar results for emerging and frontier markets, but the tax cut effect becomes insignificant for the one-year window after the tax change in developed markets, indicating a lesser degree of market underreaction.

Corporate tax cuts, merger activity, and shareholder wealth

We study the impact of the Domestic Production Activities Deduction (DPAD) on mergers and acquisitions. DPAD reduces corporate tax rates on income from work or goods made in the U.S. Results indicate that the quantity and quality of acquisition bids by DPAD-advantaged firms conform to the predictions of the neoclassical theory of the firm and the theory of financial constraints. Specifically, bids, particularly those cash-financed, increase substantially in industries with large DPAD-related tax cuts and for firms with financial constraints. Moreover, DPAD improves acquisition quality where acquirers and targets are likely to generate incremental DPAD tax benefits through their merger.

Saving the Planet by Cutting Corporate Taxes: A Comparative Case Study Analysis

This Article examines corporate tax trends in the context of the press­ing global issue of climate change. Multinational corporations play a huge role in the global economy. We argue that the role of for-profit corporations should not be limited to making short-term profits for their shareholders. If corporations benefit from corporate tax reduc­tions, some of that benefit should be shared with society. This Article explores the connection between climate change and corporate activity through a new lens: corporate tax policy. It expands the current inquiry about the impact of taxes on corporations by connecting that discussion to the impact of multinational corporate activity on the global environment. To date, while research has been done on the interaction between corporate tax avoidance and corporate social responsibility, no research has examined the connection between the global trend of corporate tax rate cuts and the increasingly important influence of corporate environmental social responsibility. This Article begins to fill that gap by making a qualitative inquiry into the interac­tion between effective corporate tax rates, corporate tax cuts, and cor­porate social responsibility.

Inter-Temporal Income-Shifting for Investment Reasons: Evidence From Private Firms

This paper examines the level and efficiency of private firms’ investments with respect to corporate tax cuts. Earlier research has focused mainly on public firms. Research into private firms is especially relevant since these companies tend to finance future growth through internal financing. Using a sample of 2,635 firm-year observations of private Spanish companies and a matched difference-in-differences analysis, our results show that private companies engaged in intertemporal income shifting to gain additional tax savings. However, this is only observed in cash-constrained firms that increased their investments immediately after the tax reform. Additionally, we provide evidence that the investments made by such firms are not always efficient. This is in line with the idea that firms receiving cash windfalls do not necessarily use them wisely.

Who Benefits from State Corporate Tax Cuts? A Local Labor Markets Approach with Heterogeneous Firms: Comment

Suarez Serrato and Zidar (2016) identify state corporate tax incidence in a spatial equilibrium model with imperfectly mobile firms. Their identification argument rests on comparative-statics omitting a channel implied by their model: the link between common determinants of a location’s attractiveness and the average idiosyncratic productivity of firms choosing that location. This compositional margin causes the labor demand elasticity to be independent from the product demand elasticity, impeding the identification of incidence from the four estimated reduced-form effects. Assigning consensual values to the unidentified parameters, we find that the incidence share born by firm-owners is closer to 25% than 40%.

Analysis of the Corporate Behaviors after the Corporate Tax Cuts with Respect to Job Creation: A Preliminary Study of Select Corporations in the United States of America

A preliminary study of the impact of tax cuts on job creation was done by studying a random sample of 12 largest corporations selected from the Fortune 500 companies. The Annual Reports of the 12 sample companies pre-tax cut and post-tax cut periods were downloaded, and figures tabulated for revenues, property, plant, and equipment (PPE) as well as employees reported by those companies for both the periods. We found that the revenue increased by an average of 7.78 percent which showed signs of growth in those companies, but the investment in PPE by the companies during the same period increased at an average of only 0.32 percent, which indicated that the companies did not divert the resources they saved in taxes to add capacity. Therefore, the potential for jobs growth was nonexistent or minimal. Another indicator showed the same outcome as the companies reported their workforce reduced since 2017 by an average of 0.54 percent.

US Corporate Tax Cuts: Spillovers to the Irish Economy

We examine spillovers to the Irish economy from US corporate income tax rate cuts and find they lead to a small but persistent increase in Irish economic output. Our analysis of the transmission channels shows that an increase in investment, employment and exports in the externally-financed industrial sector largely drives this expansion. We also find that output spillovers from US corporate income tax cuts are larger when there is slack in the Irish labour market. Our findings suggest that the changing structure of the Irish economy means any spillovers to real economic activity from the recent US corporate tax cuts could be relatively minor. However, the larger presence and shifting focus of foreign multinational corporations’ operations in Ireland means lessons from past US corporate tax cuts may be of limited value in predicting the effects of the recent US tax system reform.

State-level implications of federal tax policies

The United States federal fiscal policy has differential impact across states. We construct a new quarterly state-level dataset that we use to analyze the impact of unexpected changes in federal personal and corporate income taxes. We find substantial heterogeneity across states, with more than half having no significant response to the tax cuts. In addition, less capital intensive states have larger responses to corporate tax cuts. Although puzzling in standard models, a model with corporate and non-corporate sectors is consistent with this evidence. Overall, our results suggest the importance of variation and reallocation across states in evaluating federal policy.

US Corporate Tax Rate Cuts: Spillovers to the Irish Economy

We examine spillovers to the Irish economy from US corporate income tax rate cuts and find they lead to a small but persistent increase in Irish economic output. Our analysis of the transmission channels shows that an increase in investment, employment and exports in the externally-financed industrial sector largely drives this expansion. We also find that output spillovers from US corporate income tax cuts are larger when there is slack in the Irish labour market. Our findings suggest that the changing structure of the Irish economy means any spillovers to real economic activity from the recent US corporate tax cuts could be relatively minor. However, the larger presence and shifting focus of foreign multinational corporations’ operations in Ireland means lessons from past US corporate tax cuts may be of limited value in predicting the effects of the recent US tax system reform.

Do Corporate Tax Cuts Increase Income Inequality

Do Corporate Tax Cuts Increase Income Inequality