NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Effects of the Tax Reform Act of 1986 on Corporate Financial Policy and Organizational Form

Roger H. Gordon, Jeffrey K. MacKie-Mason

NBER Working Paper No. 3222
Issued in January 1990
NBER Program(s):   PE

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 earnings 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.

download in pdf format
   (707 K)

email paper

This paper is available as PDF (707 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w3222

Published: Slemrod, Joel (ed.) Do Taxes Matter?: The Impact of the Tax Reform Act of 1986. Cambridge, MA: The MIT Press, 1990.

Users who downloaded this paper also downloaded these:
Gordon and Slemrod w6576 Are "Real" Responses to Taxes Simply Income Shifting Between Corporate and Personal Tax Bases?
MacKie-Mason Do Firms Care Who Provides Their Financing?
Scholes and Wolfson w3095 The Effects of Changes in Tax Laws on Corporate Reorganization Activity
Poterba w3940 Why Didn't the Tax Reform Act of 1986 Raise Corporate Taxes?
MacKie-Mason w2632 Do Taxes Affect Corporate Financing Decisions?
 
Publications
Activities
Meetings
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us