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

Abstract

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 some steel firms in the Tax Reform Act of 1986 (TRA86). We find that, relative to steel firms not receiving the refund, qualifying firms experience either a negative or no significant 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, cash holdings, payouts to shareholders, acquisitions, or employment. Overall, we find the economic effects of targeted tax benefits are difficult to predict and are highly dependent on the specific facts and circumstances surrounding their implementation, consistent with some recent research but in contrast to others.

Keywords: Rifle-Shot Provision, Tax Policy, Tax Reform Act of 1986, Corporate Tax

JEL Classification: H25