Working Papers

UPDATED: Equity Financing, Dividend Taxes and Corporate "Non-Capital" Investment

Best Paper, Oxford Centre for Business Taxation, 2020 Doctoral Conference

I estimate that dividend taxes, by impacting the cost of equity financing, have large effects on the financing, investment, and real outcomes of many US public firms. But—in contrast with economists' longstanding focus on capital investment outcomes—I find these responses are mostly from smaller, cash-constrained firms through “non-capital” investment channels: R&D and operating expenditures. Exploiting a quasi-experiment that tracks financing and expenditure responses to the 2003 dividend tax cut, I estimate a large, immediate, and sustained increase in average equity financing (+86%±11%) by these firms, reflecting a high elasticity to the cost of capital. Responsive firms put the cash substantially toward operating expenditures and R&D, rather than tangible investment. I also find higher job growth and long-run sales among the responsive firms. These results make sense, reconciling mixed evidence in recent research: because dividend taxes affect the cost of equity financing, the firms impacted most are those that actually rely on equity financing---smaller, often unprofitable, less capital-intensive firms who invest heavily in ``non-capital'' pathways.

Where in the World Does Partnership Income Go? Evidence of a Growing Use of Tax Havens

Press: TaxProf Blog

Partnerships are the fastest growing class of business entity in the United States and represent over one third of reported business income, but due to their legal complexity and opaque nature economists have not yet been able to identify where a sizeable portion of this income goes. In this paper, I use US federal tax records from 2005-2019 to compile a comprehensive analysis covering 99% of the income flowing to the owners of partnerships. I find that a much larger portion goes to foreign owners than previously thought, and that most of this amount goes to tax havens—over $1 trillion since 2011. The majority of these flows likely face zero tax in either the US or in the tax haven. Evidence suggests a prevalent use of entity arrangements by investment firms that shield investors from tax and reporting. Evidence also suggests a substantial increase in income reported after the enactment of FATCA.