Market and Firm Reaction to Targeted Tax Benefits: Evidence from the Tax Reform Act of 1986

A growing body of work examines market and firm responses to specific tax benefits. We extend this literature by examining market and firm reactions to an economically significant targeted tax refund granted to a few large, but poorly performing, steel firms by the Tax Reform Act of 1986 (TRA86). We...

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Bibliographic Details
Published in:The Journal of the American Taxation Association 2022-09, Vol.44 (2), p.115-136
Main Authors: Luchs-Nuñez, Jennifer, Plesko, George A., Utke, Steven
Format: Article
Language:English
Subjects:
Investments
Tax benefits
Tax legislation
Tax reform
Tax Reform Act 1986-US
Taxation
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Summary:A growing body of work examines market and firm responses to specific tax benefits. We extend this literature by examining market and firm reactions to an economically significant targeted tax refund granted to a few large, but poorly performing, steel firms by the Tax Reform Act of 1986 (TRA86). We find, relative to steel firms not receiving the refund, qualifying firms experience either a negative or insignificant market reaction around each of three key dates in the TRA86 legislative process. Using difference-in-differences analyses to test a variety of refund uses, we find that refund recipients use the proceeds to pay down debt rather than to increase capital assets, payouts to shareholders, acquisitions, or employment. Overall, we find targeted tax benefits granted to significant but struggling firms, while potentially politically appealing, appear to generate limited economic benefits to those targeted firms. Data Availability: Data used in this study are available from public sources identified in the text. JEL Classifications: H25.
ISSN:0198-9073
1558-8017
DOI:10.2308/JATA-19-016