All An Act?

Article body

The Tax Cuts and Jobs Act (TCJA) of 2017 was created to boost the American economy, and incentivizing U.S. firms overseas to invest domestically was part of that plan.

How? Prior to the legislation, U.S. firms on foreign soil were taxed on earnings brought back into the country and stockpiled trillions of dollars overseas. Prior to the TCJA, firms could defer paying taxes on foreign earnings if those earnings remained abroad.

Proponents of the TCJA believed new tax relief would provide “rocket fuel to the U.S. economy,” helping to kick start economic growth, jobs and wages. On the other hand, the law’s opponents disagreed, stating that money would instead be funneled to shareholders.

Dr. Mollie Mathis, associate professor in the Harbert College of Business’ School of Accountancy, and a team of researchers examined thousands of U.S. companies in the three quarters before and after the legislation was passed.

The paper, “Early evidence on the use of foreign cash following the Tax Cuts and Jobs Act of 2017,” co-authored by Mathis, Dr. Brooke Beyer of Kansas State University, Dr. Jimmy Downes of the University of Nebraska and Dr. Eric Rapley of Colorado State University, revealed which side of the argument might be correct.

“In our study, we found evidence that firms with high levels of pre-TCJA foreign cash increased payouts to shareholders,” Mathis said. “In a nutshell, we find an increase in shareholder payouts rather than foreign investment. We asked, ‘Do firms with high levels of pre-TCJA foreign cash also increase capital expenditures?’ We found no evidence that firms with high levels of pre-TCJA foreign cash increased domestic expenditures.”
Mathis noted that further research showed when U.S. firms on foreign soil were given a tax holiday in the early 2000s—allowing them to bring back foreign earnings at a reduced rate—most firms did not. For the firms that did repatriate, cash instead went to shareholders.

“One important caveat to note is that not much time has passed,” she added in regard to the recent study. “It’s possible that the long-term effects could be different than the short- term. We could extend our sample period and look at more years and what’s happening over time. It’s certainly possible that U.S. firms haven’t made any decision in regards to this cash that’s now available. We could see changes in the long run that we’re not seeing in the short run.”

Mathis hinted at possible corporate loopholes.

“There's a concern that this could lead firms to shift more income to their foreign jurisdiction to avoid the U.S. taxes,” she said. “There are some new provisions aimed at limiting that behavior, and just from discussions with people in public accounting, it seems that firms are certainly taking those provisions seriously. So, I'm interested to see in the long term if this switch to a territorial tax system is going to be beneficial from a U.S. revenue perspective.”