Political Scrutiny and Tax Law Compliance: Evidence from the American Jobs Creation Act of 2004

45 Pages Posted: 15 May 2014 Last revised: 6 Feb 2015

See all articles by Jian Cao

Jian Cao

Florida Atlantic University

Yunhao Chen

Florida International University

Roy Clemons

New Mexico State University

Michael Kinney

Texas A&M University - Department of Accounting

Abstract

The American Jobs Creation Act of 2004 (the Act) created a tax holiday encouraging firms to repatriate foreign earnings and invest that capital in the United States. However, the Act did not require a direct tracing of the spending of repatriated funds; accordingly, repatriating firms could ignore the investment prescriptions of the Act since tax regulators were provided no legally viable basis to pursue violations of the spending requirements. We use this event to provide evidence on the effect of political scrutiny on firms’ tax law compliance in a setting where regulatory enforcement plays essentially no role. Our findings suggest that repatriating firms facing greater levels of policymaker scrutiny, relative to other repatriating firms, exhibited greater compliance with the Act by increasing relative expenditures on permitted uses (R&D investment) and restraining expenditures on non-permitted uses. We also find that the spending patterns are different only for the group of high-scrutiny firms (i.e., there is a threshold effect). Our estimates imply that the repatriation tax holiday induced, among such high-scrutiny firms alone, $0.41 of additional R&D spending per revenue dollar forgone by the Treasury under the Act. The evidence is generally consistent with the political cost hypothesis.

Keywords: American Jobs Creation Act; political costs; R&D investment; repatriations; share repurchases

Suggested Citation

Cao, Jian and Chen, Yunhao and Clemons, Roy and Kinney, Michael R., Political Scrutiny and Tax Law Compliance: Evidence from the American Jobs Creation Act of 2004. Journal of American Taxation Association 2014, Vol. 36, No. 2, 1-26. Available at SSRN: https://ssrn.com/abstract=2436934

Jian Cao

Florida Atlantic University ( email )

777 Glades Rd.
Boca Raton, FL 33431
United States
561-297-3727 (Phone)

Yunhao Chen

Florida International University ( email )

University Park
11200 SW 8th Street
Miami, FL 33199
United States

Roy Clemons (Contact Author)

New Mexico State University ( email )

P.O. Box 30001
Las Cruces, NM 88003-8001
United States

Michael R. Kinney

Texas A&M University - Department of Accounting ( email )

430 Wehner
College Station, TX 77843-4353
United States
979-862-2078 (Phone)
979-845-0028 (Fax)

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