Do Corporate Taxes Impede Merger and Acquisition Activity? Evidence from Private Corporations

Abstract

We study the effect of corporate taxes on mergers using tax stimulus acts that reduce corporate taxes for S corporations. S corporations generally face corporate tax on gains arising from the sale of the S corporation, or of its assets, if it was previously a C corporation. We fail to find consistent evidence that corporate tax reductions increase the likelihood of S corporation acquisition, but some evidence of acquisition price decrease. Overall, results suggest the tax changes did not achieve the desired goal of increased acquisition activity at an estimated cost to the government of $2.45 billion.

Keywords: S corporations; Corporate tax; Mergers; Asset sales; Tax policy; Lock-in effect; ARRA; ATRA; SBJA; PATH Act

JEL Classification: G34, H25, K34