Competitive Externalities of Tax Cuts

62 Pages Posted: 4 Nov 2018 Last revised: 23 Jan 2019

See all articles by Michael P. Donohoe

Michael P. Donohoe

University of Illinois at Urbana-Champaign - Department of Accountancy

Hansol Jang

University of Illinois at Urbana-Champaign - Department of Accountancy

Petro Lisowsky

Boston University Questrom School of Business; Norwegian Center for Taxation

Date Written: January 18, 2019

Abstract

We examine how tax cuts that benefit some firms are related to the economic performance of their
direct competitors. Consistent with tax cuts decreasing the cost associated with initiating
competitive strategies, we find that the decrease in the tax burden for only a certain group of firms
in the U.S. economy has a negative economic effect on the performance of its direct competitors
not directly exposed to the same tax cut. This negative externality is stronger when competitors
face financial constraints, operate in more concentrated markets, and have similar products to
their rivals. We also find that both investors and lenders price the negative externality manifested
in these competitors’ economic performance.

Keywords: American Jobs Creation Act of 2004 (AJCA), Product Market, Competition, Debt Covenants

JEL Classification: H23, H25, M21, M41

Suggested Citation

Donohoe, Michael P. and Jang, Hansol and Lisowsky, Petro, Competitive Externalities of Tax Cuts (January 18, 2019). Available at SSRN: https://ssrn.com/abstract=3265532 or http://dx.doi.org/10.2139/ssrn.3265532

Michael P. Donohoe

University of Illinois at Urbana-Champaign - Department of Accountancy ( email )

1206 South Sixth Street
Champaign, IL 61820
United States

Hansol Jang

University of Illinois at Urbana-Champaign - Department of Accountancy ( email )

1206 South Sixth Street
Champaign, IL 61820
United States

Petro Lisowsky (Contact Author)

Boston University Questrom School of Business ( email )

595 Commonwealth Avenue
Ste. 518H
Boston, MA 02215
United States
6173532661 (Phone)

Norwegian Center for Taxation ( email )

Helleveien 30
Bergen, Bergen 5045
Norway

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