Firm-Level Analysis of the Tax Cuts and Jobs Act on Capital Expenditures

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Firm-Level Analysis of the Tax Cuts and Jobs Act on Capital Expenditures, Is A Well-Researched Topic, It Is To Be Used As A Guide Or Framework For Your Research.

Abstract

This study investigates the firm-level consequences to capital expenditure levels from the passing of the Tax Cuts and Jobs Act of 2017 (TCJA). It theorized that favorable tax provisions in the TCJA would cause firms to increase their levels of capital expenditures. To test this hypothesis, the study analyzed the capital expenditure levels of public firms from 1986-2019 controlling for factors such as national gross domestic product (GDP) growth and used a dummy variable of reporting periods after 2018 to represent the effects of the TCJA. In contrast to the original hypothesis, the results demonstrate that the TCJA had a statistically significant small negative effect on the level of capital expenditures after 2018 independent of other macroeconomic, industry, and firm-level factors.

Introduction

This study examines how the Tax Cuts and Jobs Act of 2017 (TCJA) has affected capital expenditures at the firm level. The critical question that the research focuses on is has the TCJA changed firm-level behavior toward capital expenditure levels?
The main arguments in favor of the TCJA focused on the large influx cash companies would receive as a result of the law would be funneled into higher wages and large capital investments in the United States (Chalk, 2018). Wage growth has been well tracked following the passage of the TCJA by the Bureau of Economic Analysis, but capital expenditures have not been focused on as much. The TCJA lowered corporate tax rates from a top rate of 35% to a flat rate of 21%. It also authorized a tax holiday for companies to repatriate overseas profits. The TCJA also specifically incentivizes capital investments by including a 100% bonus deprecation provision which allows the expensing of capital investments immediately versus over time using the traditional Modified Accelerated Cost Recovery System. That provision lowers taxable income in the year of purchase which in turn lowers the overall tax bill of the company.
If the TCJA can be shown to increase capital expenditure levels, it reinforces the case that the act was effective in fulfilling its stated purpose. It also shows successful coordination of desired behavior and tax incentives. Policymakers in the future could use this example to argue for other tax incentives to encourage wanted behaviors. If not, the long-term projected price tag for the law would likely be much larger since capital expenditures provide the base of the projected economic growth. Without that growth, future tax revenues likely could be below projected levels resulting in higher overall costs for the tax cuts.

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Additional information

Author

Mason Westphal

No of Pages

8

Reference

YES

Format

PDF

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