Competitive Externalities of Tax Cuts

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 of initiating competitive strategies, we find that a decrease in the tax burden for only a specific group of firms in the U.S. economy (i.e., "rivals") has a negative economic effect on the performance of its direct competitors not directly exposed to the same tax cut (i.e., "competitors"). This negative externality is stronger when the relatively higher taxed competitors (1) are financially constrained, (2) operate in more competitive markets, (3) have similar products to their lower taxed rivals, (4) face rivals that retain more of their cash tax savings due to lower dividends and share repurchases, and (5)

Kebijakan Pengecualian Pajak Dividen: Kabar Baik Atau Buruk Bagi Investor

“…Chay, Chong, & Im (2022) menemukan bukti bahwa pemotongan pajak dividen di Amerika Serikat meningkatkan efisiensi investasi perusahaan yang terdaftar di bursa saham. Secara lebih lanjut pemotongan pajak dapat meningkatkan pertumbuhan ekonomi dan nilai kompetitif (Donohoe et al, 2022). Selain itu Peningkatan investasi akibat kebijakan pembebasan pajak dividen ini juga dapat mendorong terciptanya lapangan kerja yang lebih luas (Wijaya & Melati, 2021).…”

Private Equity and Local Public Finances

“…Knowledge spillovers around tax avoidance practices would constitute a negative spillover from a local government's perspective. Negative spillovers might also occur if PE‐backed firms engage in predatory behavior vis‐à‐vis peer firms and tougher negotiations with other stakeholders, crowding out other local firms and potentially lowering local tax bases (Schmidt [1997], Bernard [2016], Glaeser, Olbert, and Werner [2023], Donohoe, Jang, and Lisowsky [2022]). Further, decreases in peer firms' profitability in response to the increased competition from PE‐backed firms would typically result in lower average tax rates of these peer firms (e.g., Devereux and Griffith [2003], Drake, Hamilton, and Lusch [2020]).…”

Business model digitalization, competition, and tax savings

“…Third, we build on nascent research examining the intersection of taxes and competition. Donohoe et al (2022) show that heterogeneity in the tax savings of rival firms negatively affects competitors through reduced performance and market share. Our paper builds on Donohoe et al (2022) by examining the extent to which tax savings connected to broad changes in a firm's business model affects competition.…”

“…This approach provides us with a measure of business model digitalization that varies across firms, within industries, and within firms across time. 2 We follow Donohoe et al (2022) and measure competition by observing spillover effects among firms within the same product market space. For this purpose, we define rival firms as those firms that adopt a digital business model during the sample period, and competitor firms as all other firms that do not adopt a digital business model during the sample period.…”