Business research into Tax Cuts and Jobs Act uncovers ‘unintended consequences’

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In the final weeks of 2017, the Tax Cuts and Jobs Act (TCJA) was signed into law under the Trump administration, marking the most significant overhaul to the U.S. tax code in more than 30 years. The sweeping changes impacted individuals as well as corporate income taxes.

Within the TCJA’s 185 pages, there’s also a one-time tax on past profits from multinational U.S. companies’ foreign subsidiaries to curb the practice of siloing money overseas to avoid significant taxes and encourage capital investment at home.

Colorado State University’s Eric T. Rapley, an assistant professor of accounting in the College of Business, and a team of researchers have been looking into the impact of this area of the TCJA, and they’ve found what they call unintended consequences.

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“The message isn’t that the Tax Cuts and Jobs Act didn’t work … We’re just looking at one part of it and finding that they didn’t quite do it right.”

– Eric Rapley, assistant professor of accounting


For the past two years, Rapley and Brooke Beyer of Kansas State University, Jimmy Downes of the University of Nebraska-Lincoln, and Mollie E. Mathis of Auburn University have been examining the TCJA’s one-time tax on foreign subsidiaries and another related provision. Their research suggests that after the 2017 tax overhaul, companies used the freed-up foreign cash to buy back stock as well as — paradoxically — invest more abroad.

“Part of the motivation for the Tax Cuts and Jobs Act was to provide access to that trapped cash, and then it would turn into domestic growth that would help the economy,” Rapley said. “But what we find is that companies are using it for repurchases — they’re buying their own stock.”

The ongoing study — “Early Evidence on the Use of Foreign Cash Following the Tax Cuts and Jobs Act of 2017” — was initially presented during the American Accounting Association’s Annual Meeting in 2019, which spurred news coverage from outlets such as Politico and CFO Magazine.

Since then, the research has attracted national attention in recent weeks, cited by The Washington Post and The Los Angeles Times to fact-check claims made by presidential candidates Donald Trump and Joe Biden.

Background of study

Eric T. Rapley
Eric T. Rapley

Rapley explained the team looked at the disclosures of 436 publicly traded American companies. The researchers examined capital expenditures, stock buybacks, dividends and debt payments for the two years prior to the Tax Cuts and Jobs Act and the two years following the act’s passage to investigate if there are differences based on the amount of cash held in foreign subsidiaries.

What they find is that the TCJA spurred foreign investment due to tax incentives baked into the act: the Global Intangible Low-Taxed Income (GILTI) and the Foreign-Derived Intangible Income. Companies with high repatriation costs had a significantly greater increase in foreign property, plant, and equipment investments post-TCJA than pre-TCJA, the study finds.

“The way some of the tax law was written, in certain circumstances, it created incentives to grow foreign operations more than the domestic,” he said.

As to why such incentives would be written into the law, Rapley deferred to his co-author Mathis who is more of an expert about the TCJA details.

“Our study focuses on GILTI, which estimates income from intangible assets — e.g., patents, trademarks, and other intellectual property — using a ratio of foreign income to foreign tangible assets,” Mathis said. “Assuming that as foreign income grows relative to foreign tangible assets, this increase in foreign income must be from intangibles, which are ‘located’ abroad to avoid U.S. taxes.”

Rapley said the idea for the study was born out of previous research he worked on with Beyer and Downes that examined a financial move in which American companies would borrow against its foreign cash for shareholder payouts (i.e., dividends and stock repurchases).

With the current research, Rapley noted it only focuses on a specific part of the TCJA — the bill’s effect on multinational U.S. corporation’s use of cash held in foreign subsidiaries.

“The message isn’t that the Tax Cuts and Jobs Act didn’t work,” said Rapley who is continuing work on the research with his colleagues for publication. “We’re just looking at one part of it and finding that they didn’t quite do it right.”