Working Paper: CEPR ID: DP14950
Authors: Alexander F. Wagner; Richard Zeckhauser; Alexandre Ziegler
Abstract: 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.
Keywords: Corporate Taxes; Tax Cuts and Jobs Act; Event Study; Market Efficiency; Tax Reform
JEL Codes: G12; G14; H25; O24
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| TCJA (K34) | median effective tax rates (ETRs) (H29) |
| statutory tax rate reduction (H29) | median effective tax rates (ETRs) (H29) |
| firm characteristics (L20) | tax outcomes (H26) |
| firm size (L25) | median effective tax rates (ETRs) (H29) |
| nonrecurring tax costs or benefits (H24) | total assets (G19) |
| proxies reflecting TCJA provisions (H26) | ETR changes (R48) |
| TCJA (K34) | stock market reactions (G10) |