TY  - JOUR
AU  - Gordon,Roger H.
AU  - MacKie-Mason,Jeffrey K.
TI  - Effects of the Tax Reform Act of 1986 on Corporate Financial Policy and Organizational Form
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 3222
PY  - 1990
Y2  - December 1990
UR  - http://www.nber.org/papers/w3222
L1  - http://www.nber.org/papers/w3222.pdf
N1  - Author contact info:
Roger H. Gordon
Department of Economics 0508
University of California, San Diego
9500 Gilman Drive, Dept. 0508
La Jolla, CA 92093
Tel: 858/534-4828
Fax: 858/534-7040
E-Mail: rogordon@ucsd.edu

Jeffrey K. MacKie-Mason
Department of Economics
462 Lorch Hall
Ann Arbor, MI  48109-1220
Tel: 47/228-55127 or 47/2285-5035 fax
E-Mail: jmm@umich.edu
AB  - 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. 
ER  -