Did the 2003 Tax Act increase capital investments by corporations?

John L. Campbell, James A. Chyz, Dan S Dhaliwal, William C. Schwartz

Research output: Contribution to journalArticle

9 Citations (Scopus)

Abstract

On May 28, 2003, the Jobs and Growth Tax Relief Reconciliation Act of 2003 (2003 Tax Act) reduced shareholder-level taxes on dividends and capital gains. One of the goals of the 2003 Tax Act was to encourage capital investment by corporations. We investigate whether firms increased investment in response to the Act. We first document that capital expenditures increase after the 2003 Tax Act. We then use a difference-in-differences research design to show that this increase in capital expenditures varies predictably with two shareholder-level tax-motivated hypotheses. First, we find that the increase in investment is smaller for firms largely held by investors that are less sensitive to shareholder-level taxes. Second, we find that the increase in investment is larger for firms most likely to fund investment from new equity issuances rather than internal funds. Additional analysis suggests that while the majority of firms increase investment after the tax cut, a small subset of larger, older, and cash-rich firms increased dividend payout instead. Overall, our results suggest that, consistent with the intent of policymakers, the shareholder-level tax rate reductions set forth in the 2003 Tax Act increased corporate investment.

Original languageEnglish (US)
Pages (from-to)33-63
Number of pages31
JournalJournal of the American Taxation Association
Volume35
Issue number2
DOIs
StatePublished - 2013

Fingerprint

Capital investment
Tax
Shareholders
Capital expenditures
Tax cuts
Dividends
Investors
Capital gains
Cash
Politicians
Difference-in-differences
Reconciliation
Tax rate
Equity issuance
Research design
Tax relief
Corporate investment
Investment funds
Dividend payout
Firm investment

Keywords

  • Cost of capital
  • Institutional ownership
  • Investment
  • Shareholder taxes

ASJC Scopus subject areas

  • Finance
  • Accounting

Cite this

Did the 2003 Tax Act increase capital investments by corporations? / Campbell, John L.; Chyz, James A.; Dhaliwal, Dan S; Schwartz, William C.

In: Journal of the American Taxation Association, Vol. 35, No. 2, 2013, p. 33-63.

Research output: Contribution to journalArticle

Campbell, John L. ; Chyz, James A. ; Dhaliwal, Dan S ; Schwartz, William C. / Did the 2003 Tax Act increase capital investments by corporations?. In: Journal of the American Taxation Association. 2013 ; Vol. 35, No. 2. pp. 33-63.
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