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The Effect of the Tax Cuts and Jobs Act of 2017 on Multinational Firms’ Capital Investment: Internal Capital Market Frictions and Tax Incentives

Wednesday May 1, 2019

Abstract

The Tax Cuts and Jobs Act of 2017 (TCJA) imposes a mandatory repatriation tax on multinational firms’ unremitted foreign earnings. The new tax policy reduces internal capital market frictions through this deemed repatriation of unremitted foreign earnings and the elimination of future repatriation tax costs. This change to the United States corporate tax policy gives multinational firms access to lower cost internal capital which could be used to fund domestic investment opportunities. However, provisions within the TCJA also incentivize multinational firms to increase investment in foreign rather than domestic tangible assets. This study provides evidence that firms with high pre-TCJA repatriation costs have an increase in foreign, rather than domestic, capital expenditures. This outcome conflicts with a stated goal of the TCJA to spur domestic economic growth and highlights an unintended consequence of the TCJA.

Citation

Beyer, Brooke and Downes, Jimmy F. and Mathis, Mollie E. and Rapley, Eric T., The Effect of the Tax Cuts and Jobs Act of 2017 on Multinational Firms’ CapitalInvestment: Internal Capital Market Frictions and Tax Incentives (May 2019).