We examine the effects of the Tax Reform Act of 1986 on the financial decisions
made by firms. We review the theory and empirical predictions of prior literature for
corporate debt policy, for dividend and equity repurchase payouts to shareholders, and
for the choice of organizational form. We then compare the predictions to post-1986
experience. The change in debt/value ratios has been substantially smaller than expected.
Dividend payouts increased as predicted, but stock repurchases increased even more rapidly
which was unexpected and is difficult to understand. Based on very scant data, it appears
that some activities have shuffled among organizational forms; in particular, loss activities
may have been moved into corporate form where they are deducted at a higher tax rate,
while gain activities may have shifted towards noncorporate form, to be taxed at the
lower personal rates. In addition, several interesting new issues are raised. One concerns
previously neglected implications for the effective tax on retained erarnings that follow
from optimal trading strategies when long- and short-term capital gains are taxed at
different rates. Also, new interest allocation rules for multinational corporations provide
a substantial incentive for many firms to shift their borrowing abroad.
*Published:
Joel Slemrod, editor. Do Taxes Matter?: The Impact of the Tax Reform Actof 1986. Cambridge, MA: The MIT Press, 1991.
You may purchase this paper on-line in .pdf format
from SSRN.com ($5) for electronic delivery.
Machine-readable bibliographic record -
MARC,
RIS,
BibTeX
