I conduct research in three areas, all of which relate to the relation between tax policies and corporate investment and employment decisions. These areas: i) Federal and international tax regimes and incentives; ii) Local tax subsidies and place-based tax incentives; and iii) Net Operating Losses. The page below lists my work in these areas.
Federal and International tax regimes and incentives
with Lisa De Simone and Kevin Markle, 2019. Journal of Accounting Research, Vol 58, Issue 1, 105-153
We examine how U.S. individuals respond to regulation intended to reduce offshore tax evasion. The Foreign Account Tax Compliance Act (FATCA) requires foreign financial institutions to report information to the U.S. government regarding U.S. account holders. We first document an average $7.8 billion to $15.3 billion decrease in equity foreign portfolio investment to the United States from tax haven countries after FATCA implementation, consistent with a decrease in “round‐tripping” investments attributable to U.S. investors’ offshore tax evasion. When testing total worldwide investment out of financial accounts in tax havens post FATCA, we find an average decline of $56.6 billion to $78.0 billion. We next provide evidence of other important consequences of this regulation, including increased expatriations of U.S. citizens and greater investment in alternative assets not subject to FATCA reporting, such as residential real estate and artwork. Our study contributes to both the academic literature and policy analysis on regulation, tax evasion, and crime.
2019. Journal of Accounting Research, Vol 57, Issue 4, 1059-1114
How do U.S. companies respond to incentives intended to encourage domestic manufacturing? I study the Domestic Production Activities Deduction (DPAD), which was enacted in the American Jobs Creation Act of 2004 and was the third largest U.S. corporate tax expenditure as of 2017. Using confidential data from the U.S. Bureau of Economic Analysis, I find greater average domestic investment spending of $143.6-$146.8 million, but only within the sample of domestic-only firms and not until 2010, when the greatest statutory DPAD benefits were available. Additional evidence suggests that U.S. multinational claimants invest abroad rather than in the U.S. and that the increased investment by DPAD firms is accompanied by a reduction in the domestic workforce, consistent with a substitution of capital for labor. I show that the delayed investment response is due to firms engaging in other responses first, such as changing corporate reporting to shift income across time and borders. Quantifying the extent of these effects contributes to the literature that studies this tax deduction and informs policy makers as to the effectiveness of both manufacturing incentives and U.S. corporate income tax rate reductions in stimulating real domestic activity.
with Ralph Rector, 2016. Tax Notes, Vol 152, Issue 9, 1269-1292
This paper uses IRS C corporation 2012 tax return data to study the firms that claim the Sec. 199 deduction, thereby providing empirical evidence on the economic significance of the deduction and the characteristics of the companies that benefit from this incentive. The descriptive analyses show that, while the number of firms claiming Sec. 199 benefits is small, these firms are an economically important subset of all corporate firms and report over half of total positive corporate taxable income. Furthermore, corporations report that approximately $440 billion of taxable income qualifies for the deduction, equal to one-third of all corporate taxable income. Additional analyses show that approximately 72% of the deduction is claimed by large, multinational public firms with assets greater than $1 billion. While described as a tax deduction for domestic producers and manufacturers, only 60% of the deduction is claimed by firms in industries traditionally considered to generate production-related income. The statute has thus been applied widely by a number of firms in other industries who have identified some portion of their business that generates qualifying income. We also present data on how the statutory limitations within Sec. 199 reduce the number and extent to which firms claim the deduction, and we show how the number of firms and the amount of benefit claimed has changed over time.
with Michelle Hanlon and Rodrigo Verdi, 2015. Journal of Financial Economics, Vol 116, Issue 1, 179-196
This paper investigates whether the U.S. repatriation tax for U.S. multinational corporations affects foreign investment. Our results show that the locked-out cash due to repatriation tax costs is associated with a higher likelihood of foreign (but not domestic) acquisitions. We also find a negative association between tax-induced foreign cash holdings and the market reaction to foreign deals. This result suggests that the investment activity of firms with high repatriation tax costs is viewed by the market as less value-enhancing than that of firms with low tax costs, consistent with foreign investment of firms with high repatriation tax costs possibly reflecting agency-driven behavior.
with Shannon Chen, Lisa De Simone, and Michelle Hanlon, 2019.
We study whether innovation box tax incentives, which reduce tax rates on innovation-related income, are associated with tax-motivated income shifting, investment, and employment in the countries that implement these regimes. Using a matched sample of European multinationals’ subsidiaries operating in Europe, we find evidence consistent with firms engaging in less tax-motivated income shifting out of the country following the implementation of innovation box regimes that provide the greatest tax benefits. We also find that innovation boxes are associated with higher levels of fixed asset investment and employment relative to control observations. Our study contributes to the literature and policy debate on innovation box tax incentives by demonstrating their effectiveness in altering the location of firms’ reported income and by examining the extent to which the incentives also result in real investment and employment effects.
with Lisa De Simone, 2018.
Prior to 2018, U.S. repatriation taxes motivated companies to retain cash offshore. Using confidential jurisdiction-specific data from the Bureau of Economic Analysis, we find that firms with high tax-induced foreign cash have approximately 3.3 percent higher domestic liabilities relative to other multinationals, equivalent to $152.2 million more domestic debt per firm, or approximately $98.9-$141.9 billion in aggregate. We next examine motives for firms with tax-induced foreign cash to borrow domestically, finding this behavior is associated with shareholder payouts and some domestic investment spending. Finally, repatriations and intercompany loans from foreign subsidiaries act as substitutes and complements, respectively, to external borrowings.
Local tax subsidies and place-based tax incentives
with Cody Evans and Hanna Tian, 2018. State Tax Notes, Vol 90, Issue 3, 221-235
This article summarizes the Opportunity Zone incentive in the Tax Cuts and Jobs Act by providing descriptive statistics on the selected zones, outlining considerations for investors, and using data on the New Markets Tax Credit to inform expectations of investors’ responses to this policy.
with Lisa De Simone and Aneesh Raghunandan, 2019.
We examine the association between thousands of state and local firm-specific tax subsidies and business activity in the surrounding county, measured as the number of employees, aggregate wages, per capita employment, per capita wages, and number of business establishments. Using three different matched control groups, we find a positive association between subsidies and the employment measures. However, we show that local information – measured based on subsidy-specific disclosures, public awareness, and local press coverage – plays an important role in the effectiveness of subsidies. We also demonstrate that (i) receipt of multiple or subsequent subsidies in the same counties is critical for these employment outcomes and (ii) results are concentrated in the largest subsidy packages by dollar value. In addition, we observe mixed evidence for the relation between subsidies and business establishments and find little to no local effects for over 1,000 subsidies that cost approximately $99.8 million in aggregate. By providing a large-scale empirical analysis of the relation between firm-specific tax subsidies and aggregate economic activity at the county level, we extend a literature that generally focuses on the real effects of statutory tax policies that impact all firms in a jurisdiction. We also contribute to the accounting literature by examining the role of the local information environment in subsidy effectiveness.
Net Operating Losses (NOLs)
with Dominika Langenmayr, 2018. The Accounting Review, Vol 93, Issue 3, 237-266
We study whether the corporate tax system provides incentives for risky firm investment. We analytically and empirically show two main findings: first, risk-taking is positively related to the length of tax loss periods because the loss rules shift some risk to the government; and second, the tax rate has a positive effect on risk-taking for firms that expect to use losses, and a weak negative effect for those that cannot. Thus, the sign of the tax effect on risky investment hinges on firm-specific expectations of future loss recovery.
with Heitzman Shane, 2019.
We examine the relation between tax net operating loss (NOL) carryforwards and corporate cash holdings. Corporate taxation of passive income increases the cost of holding liquid assets (“cash”), but NOLs can shield that income from tax. We test whether NOLs are associated with greater levels of cash. We develop a new proxy for worldwide NOL benefits from footnote disclosures that more precisely captures their worldwide value and demonstrate our proxy’s superiority over common alternatives. Our empirical evidence suggests that that NOLs lead to greater cash holdings, mitigate the impact of repatriation taxes on cash holdings, and increase investor valuation of cash. Our paper provides new evidence of how corporate financial policies respond to taxation, considers interactions with other tax explanations, and demonstrates the value of proper NOL measurement.
with SP Kothari, 2012. Accounting Horizons, Vol 26, Issue 2, 335-352
The advent of the Great Recession in 2008 was the culmination of a perfect storm of lax regulation, a growing housing bubble, rising popularity of derivatives instruments, and questionable banking practices. In addition to these causes, management incentives as well as certain U.S. accounting standards contributed to the financial crisis. We outline the significant effects of these incentive structures and the role of fair value accounting standards during the crisis, and discuss implications and relevance of these rules to practitioners, standard-setters, and academics.