The Effects of the Tax Cuts and Jobs Act of 2017 on Defined Benefit Pension Contributions*

Gaertner, Fabio B.; Lynch, Daniel P.; Vernon, Mary E.

doi:10.1111/1911-3846.12604

Cited by 38 publications

(18 citation statements)

References 44 publications

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“…These findings should be useful in ongoing ex post analysis of the effects of TCJA-especially as certain political candidates are currently promoting additional tax reform as part of their legislative agendas and as foreign trade tensions continue. Finally, we also contribute to the budding literature on the consequences of the TCJA (Gaertner et al 2018, Koutney and Mills 2018, Carrizosa et al 2019, Chen et al 2019, Hanlon et al 2019, Overesch and Pflitsch 2019.…”

Section: Introductionmentioning

confidence: 99%

Making Only America Great? Non-U.S. Market Reactions to U.S. Tax Reform

2020

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We study the foreign externalities of the recent U.S. tax reform, commonly known as the Tax Cuts and Jobs Act (TCJA). Specifically, we examine foreign firms' stock returns around key tax reform events. We find significant heterogeneity in market responses by country, industry, and firm. Chinese firms experience large negative returns, especially in steel, business equipment, and chemical manufacturers, whereas the rest of the world experiences positive returns. Firms operating in more differentiated product markets experience positive returns, whereas firms in financial distress experience negative returns, consistent with the TCJA having competitive repercussions. We also find that firms experiencing decreases in effective tax rates following tax reform experience positive returns. Overall, our results suggest that the TCJA had varied, yet systematic effects on foreign firms' shareholders' wealth and the global competitive landscape.

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Section: Introductionmentioning

confidence: 99%

Making Only America Great? Non-U.S. Market Reactions to U.S. Tax Reform

2020

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“…And, finally the recent Tax Cuts and Jobs Act of 2017 reduced the top corporate tax rate from 35 percent to a flat 21 percent which offered firms strong incentives to defer taxable income recognition. Gaertner et al (2020) document evidence that firms accelerated their defined contribution pension plan contributions, increasing their tax deduction and reducing their 2017 taxable income while at the same time minimally impacting pension expense for book reporting purposes.…”

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confidence: 99%

Does Public Country‐by‐Country Reporting Deter Tax Avoidance and Income Shifting? Evidence from the European Banking Industry*

Joshi

Outslay

Persson

et al. 2020

Contemporary Accting Res

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In this study, we examine the effect of increased tax transparency on the tax planning behavior of European banks. In 2014, the European Union introduced public country-by-country reporting requirements to the banking industry. Treating this new requirement as an exogenous shock, we find limited evidence consistent with a decline in income shifting by the banks' financial affiliates in the post-adoption period (starting from 2015). We do not, however, find robust evidence of a significant change in the consolidated book effective tax rates among the affected banks. Our findings suggest that increased transparency from public countryby-country reporting can deter tax-motivated income shifting but that it did not appear to materially influence the banks' overall tax avoidance. Our findings have policy implications for the ongoing debate between the European Parliament, the Organisation for Economic Cooperation and Development, and accounting standard-setting bodies on whether to require multinationals to publish country-by-country reports.

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“…The TCJA allowed firms to make pension contributions in 2017 to take tax advantage at a higher tax rate compared to years 2018 and thereafter as the tax rate was decreased to 21% for these years. Gaertner, Lynch and Vernon (2020) find that firms on average increased DB pension contributions by 25 to 31 percent in 2017 than earlier years.…”

Section: Institutional Background Of the Pbgcmentioning

confidence: 78%

“…So far, pension funding research mostly studies the total sponsor contributions (Bodie, Light, and Morck, 1987;Datta, Iskandar-Datta, and Zychowicz, 1996;Gaertner, Lynch, and Vernon, 2020;Munnell and Soto, 2004;Rauh, 2006;Yermo and Severinson, 2010). 16 The imposed tax is 20% of the employer reversion amount for any qualified plan if the employer establishes or maintains a qualified replacement plan and the plan provides benefit increases meeting the requirements.…”

Section: Luimentioning

confidence: 99%

“…Others analyse the impact of managerial self-interest or changes in rules and the economy on corporate pension funding decisions (Datta, Iskandar-Datta, and Zychowicz, 1996;Gaertner, Lynch, and Vernon, 2020;Munnell and Soto, 2004;Yermo and Severinson, 2010). However, they ignore the difference in consequences on voluntary and mandatory contributions from taxation and excess asset reversion.…”

Section: Luimentioning

confidence: 99%

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Essays on Defined Benefit Pension Plans in the USA

Tabassum¹

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This thesis contains three fundamental and empirical essays with the aim of finding the optimum full funding limit policy for the defined benefit (DB) pension plan system in the USA in terms of Government tax earnings and pension claims. To achieve this aim, I study sponsor contributions and plan terminations in the first two essays and building on these I investigate the optimum policy limit in the third essay of the thesis. In the first essay, I investigate the influence of enforcement of full funding limits on sponsor contributions to private DB pension plans in the US. The full funding limit is a limit on the maximum asset amount that restricts the tax advantages of making voluntary contributions to pension funds. This essay fills a research gap by using only voluntary contributions to analyse the impact of the full funding limit. The results show that, sponsors are less likely to make tax-deductible voluntary contributions when the plans’ funding ratio surpasses the full funding limitation. At the other hand, a lower than required pension plan funding ratio (pension assets/ pension liabilities) increases the likelihood of a voluntary contribution. These findings together support the idea that sponsors want to prefund the balance, but only until any tax advantages are maximized. The second essay includes the full funding limit policy along with both firm and plan specific variables in studying termination decisions using a more comprehensive dataset than used in any previous study. The analysis shows that the condition of the firm only affects the termination decision for PBGC trusteed termination. The state of the plan affects both standard and PBGC trusteed terminations, but in differing ways. The tax rate affects the termination decisions, but in a manner that depends on the funding status of the plan and the type of termination. The third essay determines the optimum value of the full funding limit percentage to ensure better funding positions for defined benefit pension plans and higher profit (i.e., tax earnings – PBGC claims) for the Government. Using estimates from the first two essays and actuarial assumptions for projecting the 757 existing firms for the next 50 years, I generate scenarios to calculate the profit of the Government using tax earnings and PBGC claims for different full funding limitation percentages. My results show that, although the range is larger than the current policy, a narrow range for the full funding limit (110% of pension liability over pension assets) yields the maximum profit. This limit generates the highest tax earnings and the lowest PBGC claims out of all the tested possibilities (which ranged from 100% to 200%). The effect of this limit on tax earnings is the major contributing factor behind this finding.

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The Effects of the Tax Cuts and Jobs Act of 2017 on Defined Benefit Pension Contributions*

Cited by 38 publications

References 44 publications

Making Only America Great? Non-U.S. Market Reactions to U.S. Tax Reform

Making Only America Great? Non-U.S. Market Reactions to U.S. Tax Reform

Does Public Country‐by‐Country Reporting Deter Tax Avoidance and Income Shifting? Evidence from the European Banking Industry*

Essays on Defined Benefit Pension Plans in the USA

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