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.
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 email@example.com. 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.
Does Government Play Favorites? Evidence from Opportunity Zones
Eldar, Ofer and Garber, Chelsea
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. More
Did tax reform influence the prevalence of nonfinancial compensation incentives?
Fox, Zackery D.
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. More
What is the Impact of Opportunity Zones on Employment Outcomes?
Atkins, Rachel M. B. and Hernandez-Lagos, Pablo and Jara-Figueroa, Cristian and Seamans, Robert
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. More
Who Benefits from Place-Based Policies? Job Growth from Opportunity Zones
Arefeva, Alina and Davis, Morris A. and Ghent, Andra C. and Park, Minseon
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. More
The Effect of U.S. Tax Reform on the Tax Burdens of U.S. Domestic and Multinational Corporations
Dyreng, Scott and Gaertner, Fabio and Hoopes, Jeffrey and Vernon, Mary
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. More
The Tax Cuts and Jobs Act: Which Firms Won? Which Lost?
Wagner, Alexander F. and Zeckhauser, Richard J. and Ziegler, Alexandre
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. More
The Impact of U.S. Tax Reform on U.S. Firm Acquisitions of Domestic and Foreign Targets
Atwood, T. J. and Downes, Jimmy and Henley, Jodi and Mathis, Mollie
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. More
Do Analysts Mind the GAAP? Evidence From the Tax Cuts and Jobs Act of 2017
Chen, Novia (Xi) and Koester, Allison
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. More
The Effect of the 2017 U.S. Tax Reform on U.S. Acquisitions of Foreign Firms
Amberger, Harald and Robinson, Leslie A.
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. More
Taxes and IPO Pricing: Evidence from U.S. Tax Reform
Edwards, Alexander and Hutchens, Michelle
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. More