The Effect of U.S. Tax Reform on the Taxation of U.S. Firms' Domestic and Foreign Earnings Scott D. Dyreng* Duke University S

The Effect of U.S. Tax Reform on the Taxation of U.S. Firms’ Domestic and Foreign Earnings

Scott D. Dyreng* Duke University [email protected]

Fabio B. Gaertner University of Wisconsin-Madison [email protected]

Jeffrey L. Hoopes University of North Carolina at Chapel Hill [email protected]

Mary E. Vernon University of Wisconsin-Madison [email protected]

October 2020

Abstract: We quantify the net effect of recent U.S. tax reform on the tax rates of public U.S. corporations and find they decreased by 5.7 to 11.4 percentage points on average following tax reform. Further, we separately examine the effect of tax reform on purely domestic firms and multinational firms because some key provisions only affect multinational firms. We find both sets of firms benefited from tax reform, although domestics benefited the most. We also find the entirety of multinational tax savings stemmed from tax savings on their domestic operations, not as a result of more favorable taxation on international income. We also find no changes in federal effective tax rates on foreign income for firms most likely to be subject to new anti-abuse provisions. Overall, our findings suggest that despite the recent overhaul in international taxation, the federal tax burden on the foreign earnings of U.S. corporations appears to have been largely unaffected.

Keywords: corporate taxation, tax reform, Tax Cuts and Jobs Act JEL Classification: H25, K34

We thank Martin Jacob, John Kepler, Stacie LaPlante, Dan Lynch, Peter Merrill, Terry Shevlin, and Ben Yost for feedback on this paper.

*Corresponding author. Duke University: The Fuqua School of Business, 100 Fuqua Drive, Durham, NC 27708.

I. INTRODUCTION

Prior to tax reform in late 2017, U.S. firms faced one of the highest statutory corporate tax rates in the developed world, which, combined with a worldwide tax system, led to calls for corporate tax reform. Critics described the U.S. corporate tax system as uncompetitive and pointed to increasing balances of unremitted foreign earnings as evidence that the U.S. tax system drove corporate activity offshore (Desai 2012; Hanlon 2014). Growing calls for tax reform eventually led to the passage of the most significant tax reform in the U.S. since 1986: the congressional act known as the Tax Cuts and Jobs Act of 2017 (TCJA or tax reform). The TCJA reduced the top corporate statutory tax rate from 35 to 21 percent and overhauled international tax rules by introducing provisions that moved the U.S. to a territorial tax system, among other changes.1

Our objective is to provide empirical estimates of the actual corporate tax savings stemming from the TCJA for U.S. domestic and multinational corporations, with a particular interest in how these changes affect the U.S. taxation of U.S. domestic and foreign earnings. The move to territorial taxation was marketed as a way to increase the competitiveness of U.S. firms by reducing the direct corporate tax burden of U.S. taxation on the foreign activities of U.S. multinationals.2 At the same time, critics pointed out that decreasing the direct corporate tax burden of U.S. taxation on foreign activities might create more powerful incentives for U.S. firms to shift profits abroad, despite anti-abuse provisions designed to counter these incentives (Kamin et al., 2019). Because of the sheer number of changes stemming from the TCJA, the complex and

1The U.S. moved from a credit system (colloquially referred to as a worldwide system), where all earnings are subjected to U.S. taxation and credits are granted for foreign taxes paid, to an exemption system (colloquially referred to as a territorial system), where foreign earnings are exempt from U.S. taxation. Under either type of system, exceptions to the general rule almost always exist, such that in reality no system is purely worldwide or purely territorial. Nevertheless, we refer to the systems without qualification as worldwide or territorial throughout the study for convenience. We discuss several of the exceptions to the new U.S. territorial tax system, namely the GILTI tax and the BEAT later in the study. These exceptions have led some to refer to the new U.S. system as a hybrid system. 2 See, for example, the text of President Trump’s August 30, 2017 speech in Springfield, MO, found here: https://www.whitehouse.gov/briefings-statements/remarks-president-trump-tax-reform-springfield-mo/. 1

offsetting nature of many provisions in the law, and the potential for behavioral effects (Donohoe,

McGill, and Outslay 2013), assessing how much the TCJA reduced the tax burdens of U.S. firms solely based upon a reading of the new law is difficult, especially for multinational firms (Chen,

Erickson, Harding, Stomberg, and Xia 2019; Deloitte 2018). Nevertheless, such an assessment is crucial for policymakers as they try to determine whether the tax reform package achieved its broad intended purposes, particularly regarding the taxation of foreign earnings. Moreover, this assessment is important for academic researchers examining tax implications covering this time period, as it provides a broad picture of how the corporate tax landscape changed since the passage of the TCJA.

We begin our analysis by estimating the effect of the TCJA on both GAAP and cash effective tax rates (ETRs) for a large sample of profitable U.S. domestic and multinational firms.

This analysis provides a baseline understanding of the overall net effects of the TCJA, necessary for examining specifically how the TCJA affected the taxation of U.S. domestic and foreign earnings. Not surprisingly, we find a significant decrease in corporate effective tax rates after the

TCJA. Our results suggest the TCJA lowered the average firm’s GAAP (Cash) ETR by 11.4 (5.7) percentage points. This translates into average annual tax savings of $88.4 ($44.3) million per firm per year in the post-TCJA period.3

In the next set of tests, we quantify how the decrease in the tax burden differs between purely domestic firms and multinational firms. While both purely domestic and multinational firms were poised to reap benefits from the U.S. rate reduction, only multinationals could achieve benefits from the changes to the taxation of international income. Despite the fact that the territorial tax system was marketed as a reform that would make the international tax landscape more

3 Mean post-TCJA pretax income of $773.60 million*0.1143(0.0573) = $88.42 (44.33) million.

competitive for U.S. multinational firms (Gaertner, Hoopes, and Williams 2020), we find the

TCJA provided more tax relief to purely domestic U.S. firms than to U.S. multinational firms.

Purely domestic firms experienced an average reduction in GAAP (Cash) ETR of 12.8 (9.5) percentage points, while the corresponding reduction for multinationals was 10.6 (4.8) percentage points. Even after controlling for major provisions in the act not exclusive to multinational firms, we find that domestic firms experienced an average reduction in GAAP (Cash) ETR of 12.1 (9.3) percentage points, with a corresponding reduction for multinationals of 10.2 (3.6) percentage points. Overall, we find U.S. domestic firms achieved greater tax savings from the TCJA than U.S. multinationals in terms of effective tax rate reductions.

Finally, we examine how the TCJA affected the U.S. taxation of domestic and foreign earnings. Directly calculating the rate of U.S. tax paid on foreign income using traditional ratio- based effective tax rates is not possible, nor is directly calculating the rate of U.S. tax paid on domestic income because the numerator is contaminated with taxes paid on foreign income.

Therefore, we use the regression-based methodology developed in Dyreng and Lindsey (2009).

We estimate that the TCJA decreased the rate of federal taxes on domestic income for U.S. multinationals by 13 percentage points, suggesting the U.S. income of multinationals realized close to the full 14 percentage point reduction in statutory tax rates. Meanwhile, we find the TCJA did not significantly affect federal taxes paid on foreign earnings, despite the move to a more territorial system of taxation.

With the shift to territorial taxation, lawmakers also enacted certain anti-abuse provisions meant to curb outbound income shifting (Donohoe et al., 2019). These anti-abuse provisions subject certain types of foreign income to immediate U.S. taxation. Despite these provisions, we find that the TCJA did not significantly affect federal taxes paid on foreign earnings, even for firms

with previously low foreign tax rates and for firms with large balances of permanently reinvested earnings abroad, the types of firms expected to be most affected by the new anti-abuse provisions.

Taken together, our evidence suggests the TCJA provided substantial tax benefits to earnings on U.S. domestic economic activity. Nevertheless, adopting a territorial tax system, which in its true form exempts foreign activity from domestic taxation, had little effect on the U.S. federal tax burden of U.S. multinationals’ foreign income. Our study is the first to systematically document the effects of tax reform on U.S. firms’ domestic and foreign tax burdens, adding to the policy debate at a time when legislators and other political figures are considering the benefits and shortfalls of the TCJA.4 Our findings are particularly timely. Leading Democrats have called for a partial or complete repeal of the corporate tax cuts that were part of the TCJA. For example, Joe

Biden, the 2020 Democratic nominee for President, has suggested that his first step in tax policy as the president would be to “repeal those Trump tax cuts” (Uhler and Ferrara 2019). At the same time, others are suggesting doubling-down and strengthening parts of tax reform, such as the

GILTI (Clausing 2020). Simultaneously, many Republicans have touted the benefits of tax reform.5 Our results should also be of interest to both the media and the general public, as they increase our understanding of how the TCJA has altered the corporate tax landscape and the history of tax planning in the U.S. (e.g., Donohoe, McGill, and Outslay 2014).

II. TCJA AND EFFECTIVE TAX RATES

4 The House Ways and Means Committee recently had a hearing entitled “The Disappearing Corporate Income Tax,” with witnesses discussing the effects of the TCJA. See https://waysandmeans.house.gov/legislation/hearings/disappearing-corporate-income-tax. 5 The calls for repeal have been made in many forums. For examples, see https://www.atr.org/elizabeth-warrens- climate-plan-calls-reversing-gop-tax-cuts, https://www.washingtonexaminer.com/news/congress/bernie-sanders- calls-for-repeal-of-gop-tax-law. Likewise, statements defending have arisen in many forums. For examples, see https://www.cassidy.senate.gov/newsroom/press-releases/oped-cassidy-scalise-in-passing-a-tax-cut-republicans- helped-louisiana-, and https://twitter.com/JohnCornyn/status/1212894439787642881. 4

In the years leading up to the TCJA, many political leaders from both parties argued the corporate tax system was ripe for reform. For example, President Obama advocated lowering “the top corporate tax rate…enhancing U.S. competitiveness, and encouraging greater investment in

America” (Obama 2016). Further, President Obama favored changes that would “modernize the international tax system.”6 The common belief of the need for corporate tax reform developed for at least two reasons. First, the U.S. statutory tax rate was the highest among developed countries in 2017 and had been for several years (Auerbach, 2018; Merrill, 2010; Slemrod, 2018). Second, almost every developed economy except the U.S. had adopted a territorial tax system (Graham et al., 2010; Hanlon, 2014; Hanlon et al., 2015), sometimes called an exemption system, meaning income earned outside the home country is exempt from home-country taxation. In contrast, the

U.S. employed a worldwide tax system, sometimes called a credit system, meaning the income earned outside the home country is taxed by the home country, but the home country grants credit for taxes paid to foreign countries. Politicians on both sides of the political aisle argued that modifying the corporate tax system would enhance the competitive position of U.S. corporations in the global landscape.7

While the concept of tax reform, including a significant reduction in the statutory corporate tax rate, had bipartisan support, political disagreement over personal taxes and other details of reform (i.e., how low the corporate rate should drop) resulted in legislative inaction. The political winds changed unexpectedly in 2016, when voters elected Donald Trump as President, along with

Republican majorities in both houses of Congress. The stock market reaction around the election

6 For more details, see https://obamawhitehouse.archives.gov/issues/taxes. 7 Academic evidence pointed to large costs attributable to the U.S. worldwide tax system, including growing stockpiles of foreign cash that made U.S. firms more frequent targets of foreign acquirers De Simone et al, 2019; Foley et al, 2007; Graham et al, 2010; Hanlon, Lester, and Verdi 2015). Further, many argued that the corporate tax system in general had engendered complex tax planning involving complex legal structures both at home using special purpose entities (Demeré et al., 2020) and abroad with incorporation of subsidiaries in tax havens (Phillips et al., 2016; Dyreng et al., 2020). 5

in early 2016 suggests market participants expected meaningful tax reform to eventually pass as a result of the Republican takeover (Wagner et al., 2018). Despite several legislative twists and turns

(Gaertner, Hoopes, and Maydew 2019), the TCJA was signed into law on December 22, 2017, to which both foreign and domestic stock markets also reacted (Gaertner, Hoopes, and Williams

2020; Wagner, Zeckhauser, and Ziegler 2020).8 The TCJA was the most significant tax reform in the U.S. since the Tax Reform Act of 1986 (TRA 86) (Auerbach 2018). The new law, over 69,000 words long, affected all classes of taxpayers (corporate, individual, non-profits, etc.), and significantly transformed the corporate tax landscape in the U.S. Most prominently, the TCJA decreased the statutory corporate tax rate from 35 percent to 21 percent, a 40 percent reduction.

The TCJA resulted in many changes to the corporate tax code beyond the statutory rate decrease, many of which could affect corporate behavior and outcomes. These changes include the elimination of the corporate alternative minimum tax, increased opportunities for accelerated depreciation on capital investment, and creation of some targeted tax incentives, including the

Opportunity Zone incentive (Chen, Glaeser, and Wessel 2019; Frank, Hoopes, and Lester 2020;

Sage, Langen, and Van de Minne 2019), among other changes. The TCJA also contained several provisions with the potential to increase corporate tax burdens. For example, the TCJA limited several business deductions (Auerbach 2018), such as business interest (Carrizosa, Gaertner, and

Lynch 2019), meals and entertainment (Nash and Parker 2020), executive compensation (Luna,

Schuchard, and Stanley 2019; De Simone, McClure, and Stomberg 2020) as well as payments related to sexual harassment or sexual abuse cases (Roe and Nielsen 2019). It also altered the dividends received deduction, and eliminated the domestic production activities deduction, while

8 While studying market reactions to the TCJA is useful, Wagner et al (2020) find evidence that not all information market participants needed to price the effects of reform for a given firm was available upon passage of reform, suggesting value in examining post-reform phenomena. 6

also disallowing the carrying back of net operating losses in favor of extending the carry forward period indefinitely.

However, while these other changes affected the corporate tax system in various ways, the second-largest change after the statutory rate cut was the transformation of the international tax system (Auerbach 2018; Clausing 2020; Donohoe et al., 2019). The TCJA moved the U.S. from a worldwide to a territorial system, among other changes. As part of the move to territorial taxation, several features of the tax code were added to mitigate incentives to shift income to low-tax countries and to eliminate the incentive to re-incorporate in foreign countries that exists in territorial systems (Hasegawa and Kiyota 2017; Markle 2015). For example, a tax on so-called global intangible low-tax income (GILTI) was added, which initially imposes a 10.5 percent U.S. tax on certain foreign income earned above a 10 percent return on certain types of assets. The base erosion and anti-abuse tax (BEAT) also imposed potentially new U.S. taxes on the international income of U.S. multinational firms. While an evaluation of the precise details and merits of these provisions is beyond the scope of this paper, in short, these provisions were designed to increase the U.S. taxes paid by multinational firms on foreign earnings that are taxed abroad at low rates.9

The stock market reaction around the legislative events leading up to the enactment of the

TCJA was overwhelmingly positive, suggesting market participants expected large tax savings to accrue to corporations (Wagner, Zeckhauser, and Ziegler 2018; Gaertner, Hoopes, and Williams

2020; Wagner, Zeckhauser, and Ziegler 2020). In fact, every industry outside of Utilities, which to some extent is required to pass on tax savings to consumers, experienced positive stock returns on TCJA event dates (Gaertner, Hoopes, and Williams 2020). Soon after the bill’s passage, managers began to discuss the impact of the new legislation, which they affirmed would allow

9 Detailed information about GILTI and BEAT is available in Donohoe et al. (2019).

them to pay bonuses, increase investment, and buy back stock, indicating they expected to receive a significant windfall (Hanlon et al., 2019).

While the corporate sector as a whole appears to have benefitted from tax reform, the cross- sectional effects of tax reform are still unclear (Deloitte 2018). This is especially so for multinationals that faced substantially different tax rules than domestic firms both before and after tax reform. For example, under the old law, all income, both foreign and domestic, was subject to the U.S. tax rate of 35 percent. To prevent double taxation (by both the foreign government and the U.S.) firms were given credit for all income taxes paid in foreign jurisdictions. Additionally,

U.S. firms could indefinitely defer payment of the U.S. tax on foreign earnings by retaining these earnings abroad (and could avoid accruing tax expense for those payments by designating the earnings as indefinitely reinvested) (Erickson, Hanlon, Maydew, and Shevlin 2020). In contrast, under the TCJA, income from foreign subsidiaries are exempt from U.S. taxation, except in the case of some forms of foreign earnings, which are immediately taxable in the U.S. as part of GILTI.

Because of GILTI, even though the U.S. statutory corporate tax rate fell from 35 percent to 21 percent, it is possible that some firms will pay more U.S. tax on foreign earning because some foreign earnings are now immediately subject to U.S. taxation. Further, the BEAT limits the ability of multinational firms to make deductible payments to foreign affiliates (Erickson et al., 2020).

Given the sheer number of changes stemming from the TCJA, the offsetting nature of many of the provisions, the complexity and idiosyncratic nature of corporate operations subjected to these changes, and the behavioral response resulting from these changes, theoretically deriving the tax savings that should accrue to corporations is difficult. Our goal in this paper is to measure the size of the actual corporate tax savings stemming from the TCJA, with a particular interest in how these changes affect the U.S. taxation of U.S. domestic and foreign earnings.

III. ANALYSIS

Sample and Descriptive Statistics

We begin by selecting all non-utility, non-financial, U.S.-incorporated (i.e., FIC = “USA”) firm-years covered by Compustat (i.e., public firms) between fiscal years 1995-2019, meaning our sample includes two years of post-reform data for all timely-filed, calendar-year firms.10 We delete observations with negative pretax income, negative cash taxes paid, or negative income tax expense because measures of effective tax rates, described below, are undefined or difficult to interpret when these values negative. We also require firms to have available data for a number of firm characteristics, including property, plant, and equipment (Property, Plant, and Equip.), leverage (Leverage), selling, general, and administrative expenses (SG&A), and GAAP and cash effective tax rates (GAAP ETR, Cash ETR).11 Finally, to ensure stability in our sample for purposes of examining the evolution of tax rates, we require each firm to have at least five observations that meet our data requirements. Sample selection details for each set of tests can be found in Table 1.

The primary variables of interest are two measures of tax burden, GAAP ETR and Cash

ETR. Both measures are generally accepted in the literature as measures of the taxes firms pay

(Wilde and Wilson 2018).12 The first measure, GAAP ETR, is computed as total tax expense divided by pretax income. It captures the taxes generated by economic activity in the current year, even if those taxes will be paid in a different year. To the extent that the TCJA altered future tax liabilities, in some cases, those changes will be reflected immediately in GAAP ETR. The second measure, Cash ETR, is computed as cash paid for income taxes divided by pretax income (Dyreng

10 Our data was last updated on 04/09/2020. We start in 1995 to avoid changes in accounting rules under FAS 109 in 1992 (Miller and Skinner 1998), the change in the corporate tax rate in 1993 (Chen and Schoderbek 2000), and to make our results more comparable with Dyreng and Lindsey (2009). 11 The NOL Indicator variable is set to zero if Compustat pneumonic variable TLCF is missing. 12 Both measures encompass worldwide income taxes (both national and subnational level income taxes), meaning that these measures could be contaminated by tax changes in other countries. We are unaware of any changes large enough to account for our results. 9

et al., 2008). Cash ETR captures the amount of cash actually paid to governments around the world to satisfy income tax obligations due in the current period. However, some of those tax liabilities might have been incurred in other years. An example of the difference between the two measures specific to our setting is the deemed repatriation tax on unremitted foreign earnings. U.S. tax law prior to tax reform encouraged firms to retain untaxed earnings abroad (Foley, Hartzell, Titman, and Twite 2007). Tax reform imposed a one-time tax on these earnings, called the transition tax.

This tax is fully reflected in GAAP ETR during the transition year, while Cash ETR will reflect the tax only when it is paid, over eight years, backloaded in the eighth year.

Our dependent variable of interest is TCJA, an indicator identifying the full years of TCJA implementation (fiscal year-ends December 2018 and after). The enactment timing of the TCJA created a transition period where firms were still operating under the old regime but were also impacted by the new legislation (e.g., transition tax, re-valuation of deferred taxes). As such, we also include an indicator for the transition, Transition Year, which is an indicator identifying the transition period between regimes (fiscal year-ends from December 2017 to November 2018). The

Appendix provides further detail of the TCJA implementation timeline. We also discuss untabulated robustness tests that decompose TCJA into the two years of data we have post-TCJA implementation to examine the stability of rates in the TCJA era.

In Table 2 we report descriptive statistics for these variables as well as other variables used later in our analysis. In Panel A we show the mean, standard deviation, 25th, 50th, and 75th percentiles of each of the variables we use in the analysis that follows for the pre-TCJA period

(1995-2016) for all firms and split by domestic and multinational firms. In Panel B we show the same information for the post-TCJA period (2018-2019). The mean GAAP ETR prior to tax reform is 33.1 percent, and the mean GAAP ETR after tax reform is 21.6 percent, suggesting an 11.5- percentage point decrease from the pre- to post-period. The mean Cash ETR has a nearly 6-point

decrease from 27.0 percent in the pre-TCJA period to 21.2 percent in the post-TCJA period. Other than Leverage, which decreased significantly as a result of the TCJA’s new limitations on business interest (Carrizosa et al., 2019), all control variables are comparable across periods. Both domestic and multinational firms are similar to the full set of firms overall. For example, domestic firms show a nearly 13-percentage point decrease in GAAP ETR, while multinational firms show a 10.5- point decrease.

In Panel C, we report Pearson (Spearman) correlations above (below) the diagonal for the variables used in our analysis. As expected, GAAP ETR and Cash ETR are positively correlated.

TCJA is also negatively correlated with both GAAP ETR and Cash ETR, also as expected.

Transition Year is also negatively correlated with GAAP ETR and Cash ETR, suggesting on a univariate level the deemed repatriation and revaluation of deferred tax assets did not significantly affect effective tax rates in the transition year.

TCJA and Effective Tax Rates

In Figure 1, we plot the mean GAAP ETR and Cash ETR from 1995 to 2019 for our sample.

To make the plot interpretable, we define a variable, FIGURE YEAR, to align the fiscal period in which the transition between the old tax regime and the TCJA tax regime appears on the financial statements. FIGURE YEAR is set so 2017 is the transition year for all observations in our sample,

2016 is the year before the transition year, 2018 is the year after the transition year, and so forth.13

13 The transition year is the period between TCJA passage and full implementation. For firms with fiscal years ending December - May, FIGURE YEAR is equal to the Compustat variable FYEAR. For all other firms, the year in the figure is equal to Compustat FYEAR – 1. Details can be found in the Appendix. Establishing the correct transition period is particularly important when analyzing GAAP ETR for multinationals, as accounting rules require firms to record current tax expense for the entire one-time deemed repatriation tax on previously unremitted foreign earnings, even though the cash payments were allowed to be made in installments over eight years, backloaded on the eighth year.

In the figures, we label the transition year “2017”, the year before the transition year “2016”, and so on, such that all firms are aligned in event-time relative to the transition year.

Consistent with Dyreng et al. (2017), in Figure 1 we find a steady downward trend in GAAP

ETR throughout the entire pre-TCJA period, 1995-2016. We find a spike in GAAP ETR during

2017, the transition period, as it reflects the first year that the effects of the reform manifest in financial statements. This spike reflects the accrual of taxes imposed by the TCJA, including most prominently, the transition tax on unremitted foreign earnings, and the revaluation of deferred tax asset accounts. We also observe a sharp decrease in GAAP ETR in 2018, the first year after the transition year, suggesting firms achieved substantial tax savings because of TCJA after the one- time transition costs were accrued. Figure 1 also shows GAAP ETR stabilizes in 2019, suggesting most of the effects of the new legislation took place in the first year of enactment, and that there were no dramatic changes from 2018 to 2019.

Similar to GAAP ETR, we find a downward, though more volatile, trend in Cash ETR in the pre-TCJA period. There is no increase in Cash ETR during the transition year, as the revaluation of deferred tax assets and the deemed repatriation do not generate immediate cash tax consequences. In addition, we find a decrease of 4 percentage points in Cash ETR in 2018 from

2016, again suggesting that firms achieved tax savings from the TCJA. Similar to GAAP ETR, we find Cash ETR stabilizes in 2019, again supporting the notion that firms took little time to adjust to the new regime.

In Table 3 we estimate regressions that correspond to Figure 1, allowing us to more precisely quantify the economic magnitude of the results. In Column 1 we regress GAAP ETR on an intercept, an indicator variable for the first fiscal year ending after enactment of TCJA, which we label Transition Year, and an indicator variable for all fiscal years after Transition Year, which we label TCJA. The intercept corresponds to the average GAAP ETR in the old regime, about 33.0

percent. The coefficient on Transition Year suggests that GAAP ETR did not change in the first fiscal year ended following the implementation of TCJA. This result suggests that although Figure

1 shows a sharp increase in GAAP ETRs during the transition year, the effect in the transition year possibly varies widely across firms and is, therefore, not statistically different than prior years.

Finally, we find that GAAP ETR decreased by 11.4 percentage points in the years after the transition year, reflecting savings achieved in the new tax regime under the TCJA. This estimate corresponds to savings of $88 million per firm per year in the post TCJA period. This estimate is roughly 80 percent of what might have been achieved if firms would have recorded GAAP ETR that was lower by the full 14 percentage point drop enacted in TCJA.14

In Column 2, we repeat the exercise, except we use Cash ETR as the dependent variable.

The intercept suggests that the mean Cash ETR in the old regime is about 26.9 percent. The coefficient on Transition Year is -0.0284 suggesting that taxes paid by sample firms declined relative to their pretax income for the fiscal year ended immediately following the enactment of the TCJA before full implementation of the TCJA took effect. Finally, the coefficient on TCJA is

-0.0573, suggesting that firms achieved cash tax savings of about 5.7 percentage points once the

TCJA was fully implemented. This estimate corresponds to savings of $44 million per firm per year in the post TCJA period.

Domestics vs. Multinationals

In Figure 2 we plot the same data as in Figure 1 but split the sample into two groups, one for purely U.S. domestic firms and one for U.S. multinationals. In Panel A we plot the mean of

GAAP ETR separately for purely domestic firms and for multinational firms. The trends look similar for both groups of firms until 2017 when multinational firms show a large increase in

14 All inferences in this study are robust to including a time trend variable as well as including a time trend, time trend squared, and time trend cubed variables.

GAAP ETRs while purely domestic firms show no such spike. This suggests multinational firms experienced a significant increase in GAAP ETRs likely due to the deemed repatriation that manifests in the financial statements during this year. Purely domestic firms do not experience a large increase in GAAP ETRs as expected due to the revaluation of deferred tax assets. Purely domestic firms also have a slightly lower GAAP ETR in the post-TCJA period than multinational firms. In Panel B we plot the mean of Cash ETR for the two groups. The trends look similar, but purely domestics have a visibly larger decline in Cash ETR after TCJA became fully effective.

In Table 4 we extend Table 3 by estimating the regressions separately for purely domestic firms and for multinational firms. These regressions help us statistically interpret Figure 2. The coefficient on TCJA suggests that GAAP ETR (Cash ETR) decreases by 12.8 (9.5) percentage points for U.S. domestic firms in the years after the TCJA was fully implemented. Meanwhile,

GAAP ETR (Cash ETR) decreases by only 10.6 (4.8) percentage points for U.S. multinationals in the years after the TCJA was fully implemented. The differences between purely domestic firms and multinational firms are both economically and statistically significant and indicate that tax savings for domestic firms were significantly larger than for multinationals.

Further, while just prior to the TCJA domestics faced higher GAAP ETRs than multinationals, both groups experience similarly low GAAP ETRs post TCJA. Further, while Cash

ETRs for purely domestics were already slightly lower than multinationals in the years leading up to tax reform, we find that this gap is considerably accentuated following the enactment of the

TCJA. Overall, it appears tax reform had a meaningful impact on the distribution of taxes between domestic and multinational firms.

As mentioned previously, the TCJA modified a number of other corporate provisions, and these changes could potentially affect purely domestic firms and multinational firms differently.

We evaluate this possibility in Table 5, where we report estimates from regressions similar to Table

4, but include several variables that capture characteristics associated with firms that are most likely to be sensitive to some of the key changes in corporate tax provisions, as modified by the

TCJA. Specifically; we examine SG&A, to proxy for changes related to employee/general deductions; Leverage, to capture the effects of new interest deductibility limitations15; Property,

Plant, and Equip., to evaluate the effects of new expensing rules16; and NOL Indicator, to capture the effect of new loss carryforward rules.17 We find that when controlling for these additional firm characteristics, the differential between domestics’ and multinationals’ GAAP ETR reductions becomes insignificant, although the differential in Cash ETR reductions remains significant and increases in economic magnitude.

The sources of the benefits that accrue to domestics and multinationals are unclear from a simple comparison of ETRs. While all domestic income is potentially subject to the new lower statutory tax rate, foreign earnings are subject to a new system of international taxation. That is, the effect of TCJA on multinational firms is difficult to predict ex-ante because it is possible that the new rules result in higher federal taxes on foreign earnings due to provisions like GILTI. As such, a simple comparison of ETRs fails to reflect whether the differential in tax savings between domestics and multinationals is a result of changes in the taxation of domestic income, foreign income, or both. To better identify the source of tax savings following the TCJA, we consider systematic changes in the taxation of domestic and foreign income in a later section.

Robustness Test

15 Results are robust to instead including the lagged interest to income ratio (xintt-1/pit-1). Due to data availability and the desire to keep our sample as large as possible to ensure our results speak to the broadest set of corporations, we use Leverage in our primary tests. 16 Results are robust to instead using prior-year capital expenditures. 17 Since we do not include firms with current-year book losses, we do not have a credible proxy for the newly created net operating losses that would be subject to the 80 percent of taxable income or carryback limitations as provided in the new TCJA. Results are not sensitive to excluding the NOL variable and its interactions. 15

In untabulated analysis, we also examine the two years of post TCJA data (2018 and

2019) separately to examine the stability of effective tax rates across both years. For example,

Staff Accounting Bulletin 118 (SAB 118) allows firms that are unable to make a “reasonable estimate” of the tax effects of the TCJA provisions in the financial statements during the year of the tax law enactment to recognize a “reasonable estimate” in a subsequent period (within 12 months from enactment). Although Figures 1 through 3 show relative consistency across the two years, this finding could be different in a multivariate setting. Similar to Table 5, we regress

GAAP ETR and Cash ETR on 2018 and 2019 (instead of TCJA) along with Transition Year and firm characteristics.18 For the full sample of firms, we find GAAP ETRs decrease slightly from

2018 into 2019 (2018 coef. =-0.1003; 2019 coef. = -0.1289), suggesting the provisional adjustments under SAB 118 did not have a major effect on firms’ GAAP ETRs in the years post-

TCJA enactment, on average. Cash ETRs for the full sample of firms do not differ across 2019 and 2018. These findings are consistent with the visual representation in Figure 2. Untabulated multivariate results corresponding with Figures 2 and 3 are also consistent with the visual representations.

Effective Tax Rate Savings by Industry

We next examine how the effects of the TCJA varied across firms in different industries.

In Figure 3 we show GAAP (Cash) ETR Savings, calculated as average pre-TCJA GAAP (Cash)

18 We define 2018 and 2019 the same as we do in Figures 1-3 for comparability of inferences. Although results are consistent when using fiscal years post-TCJA implementation. 16

ETRs (2015-2016) less average post-TCJA GAAP (Cash) ETRs (2018-2019), by industry.19

Industries are presented in Figure 3 in descending order of the level of GAAP ETR Savings.

Miscellaneous Retail benefitted the most with the highest level of GAAP ETR Savings, a

13-percentage point reduction in GAAP ETR from pre- to post-TCJA implementation.

Pharmaceuticals experienced the lowest reduction in GAAP ETR, saving only 3 percentage points.

Regarding Cash ETR Savings, Wholesale firms show the highest amount of savings with an 11- percentage point reduction in Cash ETR. The Food industry similarly had a large reduction in Cash

ETR with a nine-percentage point reduction. Finally, Building Materials is the only industry that did not show ETR savings with a half-point increase in Cash ETR post-TCJA compared to pre-

TCJA. In summary, Figure 3 shows the wide variation in effective tax rate savings stemming from the implementation of the TCJA across industries.

Federal Tax on Foreign Income

Under the U.S. corporate tax system prior to the TCJA, foreign earnings of U.S. firms were subjected to U.S. taxation, with credit granted for taxes paid to foreign governments. Additionally, firms could defer U.S. tax on foreign earnings until the earnings were returned to the U.S. parent.

As a result, firms with sufficient financial flexibility to retain earnings abroad indefinitely paid little or no federal taxes on foreign earnings. Firms with less financial flexibility paid federal taxes on foreign earnings to the extent those earnings were not protected by foreign tax credits. Dyreng and Lindsey (2009) estimate that U.S. multinational firms paid, on average, about 4 percent of their foreign earnings in U.S. federal taxes each year during the pre-TCJA tax regime.

One of the key corporate tax changes imposed by the TCJA was the exemption of foreign income from U.S. taxation as the U.S. adopted a territorial tax system. Nevertheless, exceptions to

19 GAAP ETR Savings is calculated as [(txt2015,i+txt2016,i)/(pi2015,i+pi2016,i)]-[(txt2018,i+txt2019,i)/ (pi2018,i+pi2019,i)], then averaged for each industry. Cash ETR Savings is calculated as [(txpd2015,i+txpd2016,i)/(pi2015,i+pi2016,i)]- [(txpd2018,i+txpd2019,i)/ (pi2018,i+pi2019,i)], then averaged for each industry. 17

the exemption of foreign earnings were created, including the GILTI and BEAT, as discussed earlier, which impose U.S. taxes on certain types of foreign income or limit tax deductions for payments to certain foreign entities. To the extent that GILTI and BEAT are binding, U.S. firms will continue to pay some amount of federal taxes on their foreign earnings, although it is unclear ex-ante what that amount will be.

One key question arising in the aftermath of the TCJA is whether firms will pay more or less U.S. tax on foreign earnings in the new regime relative to the old regime. To answer this question, we follow Dyreng and Lindsey (2009) who develop a methodology to estimate federal taxes paid on foreign income. Dyreng and Lindsey (2009) model current federal tax expense as a function of pretax domestic income and pretax foreign income and show that the coefficients can be interpreted as the current federal effective tax rate on each corresponding measure of income.

We examine the rate of federal tax on domestic and foreign incomes before and after TCJA by following Dyreng and Lindsey (2009), while allowing all coefficients in the model to vary between pre- and post-TCJA periods by including TCJA along with all relevant interactions. To ensure our results are not affected by the transition year, we also include Transition Year, along with all relevant interactions.

We report results from these regressions in Table 6.20 The coefficient on Domestic Income is 0.2959, suggesting that for every $1 of pretax domestic income in the pre-TCJA period, multinationals paid about $0.30 in federal income taxes. The coefficient TCJA*Domestic Income is -0.1306, suggesting that the federal tax rate on domestic income dropped by 13 percentage points after the TCJA, corresponding very closely to the actual decline in the U.S. statutory tax rate of 14 percentage points.

20 Our variable definitions, control variables, and sample selection criteria are all consistent with Dyreng and Lindsey (2009). We find similar estimates when including a time trend variable, although the original study did not include a time trend variable. 18

In Table 6 we also report that the coefficient on Foreign Income is 0.0635, meaning that in the pre-TCJA period, multinational firms paid about $0.06 in federal taxes for each $1 of pretax foreign income.21 The coefficient on TCJA*Foreign Income is -0.0046 and statistically insignificant from zero, suggesting that the rate of federal tax on foreign earnings did not change for the average company after the TCJA. This suggests the federal tax burden on foreign profits is similar under both old and new tax regimes. Thus, despite the recent overhaul in international taxation, including the change from a worldwide to a territorial system, we find that the federal tax burden on foreign profits is largely unchanged. This finding is consistent with the new system being a hybrid system in the sense that some foreign earnings remain taxable in the U.S.

We also report results of the regression when the dependent variable is current foreign tax expense in the second column of Table 6. As Dyreng and Lindsey (2009) show, this model yields coefficients which can be interpreted as the current foreign effective tax rate on both domestic and foreign income. The corresponding results show a coefficient on Foreign Income of 0.2216, meaning in the pre-TCJA period, multinational firms paid about $0.22 in foreign taxes for each $1 of pretax foreign income. The coefficient on TCJA*Foreign Income is -0.0173 and marginally significant, suggesting the rate of foreign tax on foreign income slightly decreased on average after

TCJA enactment.

Anti-Abuse Provisions for Federal Tax on Foreign Income

As noted earlier, the TCJA introduced new provisions to prevent firms from engaging in base erosion and profit shifting. Chief among these provisions is the GILTI, which essentially requires U.S. firms to immediately pay federal tax on foreign earnings meeting certain criteria, such as arising from assets that generate a return higher than 10 percent. Thus, despite the fact that

21 This coefficient is higher than the 0.044 reported in Dyreng and Lindsey (2009) because in the ten additional years of pre-TCJA data in our sample, the average foreign tax on foreign income decreased. This led to more domestic tax being paid on foreign income due to the worldwide system in place during the time. 19

the new U.S. tax system is an exemption system, GILTI is not exempt from U.S. tax. The BEAT, on the other hand, acts as a minimum tax add-on by disallowing deductions paid to foreign affiliates under certain circumstances.22 The two provisions target firms that paid very low tax rates on foreign earnings in the pre-TCJA regime. Consequently, we expect the federal tax rate on foreign earnings will likely increase for firms most likely affected by these new provisions.

To examine this possibility, we extend the model from Table 6 by allowing any coefficients related to foreign income to also vary with an indicator suggesting a higher likelihood of being affected by the new anti-abuse provisions (Anti-abuse). This allows us to examine whether the rate of federal tax on foreign income changed after TCJA enactment for firms most likely affected by the new anti-abuse provisions compared to firms less likely to be materially affected by these provisions. We measure Anti-abuse in two different ways. First, given that the anti-abuse provisions were intended to be a check on firms paying little foreign tax on foreign earnings, we examine firms with a foreign effective tax rate below the median over the previous five years.23

Low 5-Year Lagged Foreign ETR equals one if the firm’s average foreign effective tax rate is below the median over the previous five years. Second, we examine firms with above-median values of scaled permanently reinvested earnings in 2016, because those firms were likely able to shift income to low-tax countries and avoid U.S. tax by retaining their earnings abroad.24 Above

Median Lagged PRE Balance equals one if the firm’s PRE balance, scaled by assets, is above the median just prior to tax reform.

We report the results in Table 7. The coefficients on Domestic Income and Foreign Income are virtually the same as those found in Table 6 and across both measures of Anti-abuse.

22 While precise details underlying these provisions are beyond the scope of this paper, you can find information about GILTI and BEAT in Donohoe et al. (2019). 23 Results using a three-year measure are nearly identical. 24 Ideally, we would use the value of unremitted foreign earnings, but this value is not available. We use the value of permanently reinvested foreign earnings as a proxy for unremitted foreign earnings. 20

Surprisingly, for firms that are likely most affected by the anti-abuse provisions, we find that the coefficient on the interaction TCJA*Anti-abuse*Foreign Income in columns (1) and (3) is insignificant in both specifications, suggesting the anti-abuse provisions appear to have had little effect in the post-reform regime period.25 That is, firms that were targeted by GILTI and BEAT appear to pay no more federal tax on foreign earnings in the post-TCJA period than they did in the pre-TCJA period. As in Table 6, we also report regression results including the effects of Anti- abuse when the dependent variable is current foreign tax expense (see Table 7, columns (2) and

(4)). We find the coefficient on TCJA*Anti-abuse*Foreign Income is insignificant in column (2).

Our analysis of federal tax rates on foreign income yields several key takeaways. First, domestic activities clearly benefited the most from tax reform, as profits from these operations received close to the full benefits from the decrease in the statutory corporate tax rate. Second, foreign activities received no tax benefit from tax reform on average, and on average, firms pay no more federal tax on foreign earnings than they did previous to tax reform. This particular finding is interesting because it shows the federal tax burden on foreign income is largely unchanged, despite the recent overhaul in the international tax system. We caution, however, that multinationals could still have benefitted from tax reform, as the TCJA unambiguously reduces the incentives to retain cash abroad since firms no longer have to avoid repatriation to avoid U.S. taxation of foreign earnings. Third, foreign activities likely to be associated with tax abuse did not face significant increases in the federal tax rate, suggesting the new anti-abuse provisions do not appear to have increased U.S. taxes for the average affected U.S. firm. Taken together, our results

25 Results are consistent when splitting TCJA into 2018 and 2019 years supporting the consistency in treatment across these two TCJA-era years. 21

show the TCJA heavily benefits domestic activities while leaving the federal tax burden on foreign income essentially unchanged.26

IV. CONCLUSION

The TCJA reduced corporate statutory tax rates from 35 percent to 21 percent, providing significant statutory tax relief to the corporate sector. The TCJA also changed the U.S. international tax system from a worldwide tax system to a territorial tax system. Estimates of the actual tax consequences realized by public corporations as a result of the TCJA are scarce. Our results show the average firm in our sample realized a reduction in its effective tax rate of 5.7 to

11.4 percentage points. Concealed in this estimate, however, is the fact that corporations did not participate in the tax cut evenly. Purely domestic firms benefited most, while multinationals only benefited from their domestic operations. Similarly in exploratory descriptive analysis, we find wide variation across industries in the amount of tax savings in the TCJA era. The move to a territorial tax system did not result in a lower domestic tax burden on the foreign income of U.S. multinationals, nor do firms facing anti-abuse provisions pay more federal tax on foreign earnings than they did previous to tax reform.

Our study is not without limitations. The proximity of our study to the effective date of the

TCJA constrains us to only examine the initial period following the TCJA enactment, although

2019 results indicate some stability in effective tax rates following the initial drop.

Notwithstanding these limitations, we believe this study offers timely insight into the corporate effects of the TCJA by examining the differential tax effects of the new legislation on domestic and foreign activity.

26 Despite tax reform having a national bias, in untabulated results we find no evidence of local bias, as companies in both Blue and Red states appear to benefit similarly, unlike, for example, other tax reform provisions (Altig et al., 2019).

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APPENDIX Timeline of Transition and TCJA

FIGURE A.1

Due to the timing of the passage of the TCJA (December 22, 2017) and its effective date (January 1, 2018), firms face a transition fiscal year, defined as the period between the TCJA passage and full implementation. During this transition year, firms must revalue their deferred tax assets and liabilities at the newly enacted tax rate of 21 percent for financial reporting purposes. Firms may also face a blended tax rate for tax reporting purposes. Most firms are calendar year firms and face this transition year in their 2017 fiscal year financial statements. However, for the non-calendar year firms, the transition year may or may not be the 2017 fiscal year. Therefore, simply dropping 2017 fiscal year firms from the TCJA analyses could produce inaccurate inferences. In order to properly account for this transition year, researchers must drop firms with year-ends between December 2017 and November 2018. Firms that fall within this time period are deemed Transition Year firms within our sample. Starting December 2018 is when the full effect of the TCJA provisions will be captured. Firm fiscal year-ends starting December 2018 and later are deemed TCJA year firms within our sample. For the purposes of the figures in this study, we follow an adjusted year-designation to allow better comparison across years around the TCJA passage and implementation. We first label each firm’s Transition Year as 2017, regardless of the actual calendar or fiscal year. The year before the Transition Year is labeled as 2016. The year two years before the Transition Year is labeled 2015, and so on, such that all firms are aligned in event- time relative to the transition year. This ensures each year around the TCJA passage and implementation has a comparable set of firms to the year before and year after. See line “Figure Year” in the above table for year-end assignments specifically for the figures. Only firms with year-ends of June through November have a “Figure Year” different than their fiscal year.

FIGURE 1 Average GAAP and Cash Effective Tax Rates.

This graph depicts the trends in the average Cash and GAAP effective tax rates (ETRs) for our sample of firms for years 1995 to 2019. See the Appendix for year descriptions. GAAP ETR is calculated as tax expense (TXT) over pretax income (PI). If GAAP ETR is greater than 1 or less than 0, the observation is set to missing. Cash ETR is calculated as cash taxes paid (TXPD) over pretax income (PI). If Cash ETR is greater than 1 or less than 0, the observation is set to missing.

FIGURE 2 Average Effective Tax Rates for Domestic and Multinational Firms. Panel A: GAAP Effective Tax Rates

(continued)

Panel B: Cash Effective Tax Rates

This graph depicts the trends in the average effective tax rates (ETRs) for our sample of firms, split between domestic firms and multinational firms, for years 1995 to 2019. See the Appendix for year descriptions. Panel A reports results for GAAP ETR, while Panel B reports results for Cash ETR. GAAP ETR is calculated as tax expense (TXT) over pretax income (PI). If GAAP ETR is greater than 1 or less than 0, the observation is set to missing. Cash ETR is calculated as cash taxes paid (TXPD) over pretax income (PI). If Cash ETR is greater than 1 or less than 0, the observation is set to missing.

FIGURE 3 Effective Tax Rate Savings by Industry

This graph depicts the average effective tax rate savings by industry in the TCJA era. Industries are as defined in Barth, Beaver, Hand, and Landsman (2005). GAAP ETR Savings is calculated as [(txt2015,i+txt2016,i)/(pi2015,i+pi2016,i)]-[(txt2018,i+txt2019,i)/ (pi2018,i+pi2019,i)], then averaged within each industry. Cash ETR Savings is calculated as [(txpd2015,i+txpd2016,i)/(pi2015,i+pi2016,i)]-[(txpd2018,i+txpd2019,i)/ (pi2018,i+pi2019,i)], then averaged within each industry. Firms must have non-missing, positive numerators and denominators for both the pre- and post-TCJA effective tax rates. Firms must also have available data for all years from 2015-2019 to ensure consistency across periods. Industries with fewer than five firms (Extractive (three firms), Misc. Manufacturing (three firms), and Restaurants (four firms)) are combined with the Other industry.

TABLE 1 Sample Composition. Panel A: Full Sample, TCJA Broad Effects (Tables 2-5) Number of Number of Criteria firms firm-years

All non-utility, non-financial, US-incorporated Compustat observations between 1995 and 14,094 112,779 2019 with assets greater than $10 million

Require non-missing and non-negative cash tax 10,558 70,465 paid (TXPD) and GAAP tax expense (TXT)

Require non-missing and non-negative pretax 8,550 54,773 income (PI) Require non-missing GAAP ETR and Cash 8,393 52,465 ETR Require non-missing control variables 6,888 42,634 Require at least five observations 3,022 34,573

Panel B: MNC Sample, Domestic and Foreign Income Effects (Tables 6-7) Number of Number of Criteria firms firm-years All non-utility, non-financial, US-incorporated multinational Compustat observations between 7,946 52,136 1995 and 2019 with assets greater than $10 million Require non-missing federal current tax expense (TXFED) and foreign current tax 5,567 44,492 expense (TXFO) Require non-missing and non-negative domestic pretax income (PIDOM) and foreign 3,352 20,020 pretax income (PIFO) Require non-missing control variables 3,295 19,221 Require at least five observations 1,420 15,374 This table presents our sample selection process for our primary samples from years 1995 to 2019. Panel A describes the sample used in tables 2-5 for the broadest set of firms to examine the effects of the TCJA. Panel B describes the sample used in tables 6-7, in accordance with the sample selection criteria in Dyreng and Lindsey (2009). Financial firms and utility firms are included in these samples. Compustat data item pneumonics are reported in parentheses in all caps and italics.

TABLE 2 Descriptive Statistics. Panel A: 1995-2016 All Firms Variable N Mean Std. Dev. 25th Median 75th GAAP ETR 32,121 0.331 0.114 0.291 0.354 0.386 Cash ETR 32,121 0.270 0.169 0.149 0.268 0.362 Size 32,121 6.328 1.920 4.974 6.280 7.593 SG&A 32,079 0.309 0.232 0.139 0.255 0.420 Leverage 32,079 0.242 0.271 0.032 0.196 0.354 Property, Plant, and Equip. 32,121 0.300 0.273 0.115 0.228 0.403 NOL Indicator 32,121 0.379 0.485 0.000 0.000 1.000 ROA 32,121 0.135 0.117 0.064 0.108 0.173

Domestic Firms Multinational Firms Variable N Mean Std. Dev. Median N Mean Std. Dev. Median GAAP ETR 12,191 0.342 0.115 0.371 19,930 0.323 0.113 0.338 Cash ETR 12,191 0.267 0.180 0.279 19,930 0.271 0.162 0.263 Size 12,191 5.342 1.689 5.279 19,930 6.931 1.799 6.868 SG&A 12,166 0.336 0.271 0.269 19,913 0.293 0.204 0.249 Leverage 12,181 0.248 0.319 0.179 19,898 0.238 0.236 0.204 Property, Plant, and Equip. 12,191 0.370 0.337 0.293 19,930 0.256 0.213 0.200 NOL Indicator 12,191 0.227 0.419 0.000 19,930 0.472 0.499 0.000 ROA 12,191 0.144 0.140 0.112 19,930 0.129 0.101 0.105

Panel B: 2018-2019 All Firms Variable N Mean Std. Dev. 25th Median 75th GAAP ETR 1,594 0.216 0.103 0.167 0.218 0.252 Cash ETR 1,594 0.212 0.140 0.129 0.198 0.263 Size 1,594 7.654 1.843 6.562 7.655 8.833 SG&A 1,594 0.237 0.188 0.101 0.184 0.320 Leverage 1,590 0.328 0.272 0.131 0.296 0.455 Property, Plant, and Equip. 1,593 0.276 0.246 0.102 0.198 0.370 NOL Indicator 1,594 0.669 0.471 0.000 1.000 1.000 ROA 1,594 0.109 0.083 0.057 0.090 0.137

Domestic Firms Multinational Firms Variable N Mean Std. Dev. Median N Mean Std. Dev. Median GAAP ETR 330 0.214 0.088 0.227 1,264 0.217 0.107 0.215 Cash ETR 330 0.172 0.128 0.176 1,264 0.223 0.142 0.205 Size 330 6.476 1.754 6.530 1,264 7.962 1.740 7.874 SG&A 330 0.260 0.223 0.188 1,264 0.231 0.177 0.184 Leverage 329 0.307 0.303 0.262 1,261 0.334 0.263 0.300 Property, Plant, and Equip. 329 0.369 0.328 0.282 1,264 0.252 0.213 0.191 NOL Indicator 330 0.464 0.499 0.000 1,264 0.722 0.448 1.000 ROA 330 0.117 0.088 0.093 1,264 0.107 0.082 0.089

Panel C: Pearson (Spearman) Correlations Above (Below) the Diagonal Transition NOL GAAP ETR Cash ETR TCJA MNC Size SG&A Leverage PPE ROA Year Indicator GAAP ETR - 0.350* -0.202* 0.018* -0.069* -0.070* 0.098* 0.006 0.004 -0.113* 0.010 Cash ETR 0.343* - -0.071* -0.024* 0.013* -0.016* 0.096* -0.051* -0.081* -0.129* -0.024* TCJA -0.233* -0.086* - -0.035* 0.059 0.141* -0.064* 0.066* -0.017* 0.121* -0.046* Transition Year -0.011* -0.027* -0.035* - 0.047* 0.072* -0.028* 0.019* -0.039* 0.078* -0.011* MNC -0.172* 0.004 0.059* 0.047* - 0.393* -0.081* 0.002 -0.198* 0.246* -0.053* Size -0.149* -0.020* 0.140* 0.073* 0.397* - -0.309* 0.180* 0.040* 0.201* -0.140* SG&A 0.149* 0.136* -0.071* -0.025* -0.033* -0.321* - -0.130* -0.184* -0.068* 0.233* Leverage 0.014* -0.068* 0.080* 0.023* 0.047* 0.315* -0.259* - 0.306* 0.071* -0.117* PPE 0.044* -0.030* -0.021* -0.043* -0.171* 0.061* -0.231* 0.255* - -0.114* 0.030* NOL Indicator -0.156* -0.151* 0.121* 0.078* 0.246* 0.219* -0.060* 0.094* -0.145* - -0.135* ROA 0.037* 0.058* -0.051* -0.004 -0.026* -0.112* 0.248* -0.271* 0.027* -0.156* -

This table presents descriptive statistics for years 1995 to 2016 (Panel A) and 2018 to 2019 (Panel B) including mean, standard deviation, 25th percentile, median, and 75th percentile for the full sample firms. Statistics are also split for domestic (MNC=0) and multinational (MNC=1) firms over the same time periods. Unlike the regressions which are measured at t-1 to ensure the effects of the TCJA are not also capture in the control variables, the variables in this table are measured at t to enable comparison of pre-TCJA and post-TCJA univariate changes. This also explains why there are some missing observations, our sample selection is based on availability of control variables at t-1. Panel C includes Pearson (Spearman) correlations above (below) the diagonal for the full time period. * indicates significance at the 5 percent level for two-tailed tests.

TABLE 3 TCJA and Effective Tax Rates. (1) (2) Dependent Variable GAAP ETR Cash ETR

TCJA -0.1143*** -0.0573*** (-39.200) (-14.416) Transition Year 0.0082 -0.0284*** (1.124) (-5.666) Constant 0.3305*** 0.2696*** (251.575) (154.783)

Observations 34,573 34,573 R-squared 0.041 0.006 Cluster SE by Firm Yes Yes

This table presents estimates of equation (1) for years 1995 to 2019 including an indicator variable TCJA equal to 1 for year-ends of December 31, 2018 or later and an indicator variable Transition Year equal to 1 for year-ends from December 31, 2017 to November 30, 2018. Coefficients are reported with t-statistics in parentheses. *** denotes significance at a 1 percent level for two-tailed test.

TABLE 4 TCJA and Effective Tax Rates for Domestic and Multinational Firms. Difference: Difference (1) (2) (1) & (2) (3) (4) : (3) & (4) Dependent P-value P-value Variable GAAP ETR (Chi2) Cash ETR (Chi2) Domestic MNC Domestic MNC

TCJA -0.1284*** -0.1064*** 0.001 -0.0947*** -0.0484*** 0.000 (-22.892) (-31.677) 11.31 (-12.337) (-10.669) 26.70 Transition Year -0.0721*** 0.0345*** -0.0217* -0.0312*** (-5.664) (4.056) (-1.758) (-5.706) Constant 0.3422*** 0.3233*** 0.2669*** 0.2712*** (162.970) (211.579) (90.183) (135.913)

Observations 12,708 21,865 12,708 21,865 R-squared 0.035 0.047 0.007 0.006 Cluster SE by Firm Yes Yes Yes Yes This table presents estimates of equation (1) for years 1995 to 2019 including an indicator variable TCJA equal to 1 for year-ends of December 31, 2018 or later and an indicator variable Transition Year equal to 1 for year-ends from December 31, 2017 to November 30, 2018. Columns 1 and 3 present results for domestic firms, and columns 2 and 4 present results for multinational firms (MNC). Columns 1 and 2 (3 and 4) present results using GAAP ETR (Cash ETR) as the dependent variable. Coefficients are reported with t-statistics in parenthesis. *** denotes significance at a 1 percent level for two-tailed test.

TABLE 5 TCJA and Effective Tax Rates for Domestic and Multinational Firms with Additional Control Variables. (1) (2) Difference: (3) (4) Difference: (1) & (2) (3) & (4) P-value P-value Dependent Variable GAAP ETR (Chi2) Cash ETR (Chi2) Domestic MNC Domestic MNC

TCJA -0.1211*** -0.1017*** 0.2617 -0.0925*** -0.0363** 0.015 (-8.501) (-9.985) 1.26 (-5.224) (-2.440) 5.89 Transition Year 0.0340 -0.0080 0.0250 -0.0034 (1.559) (-0.345) (0.770) (-0.110) TCJA*SG&A -0.0807*** 0.0779*** -0.0303 -0.0086 (-3.142) (2.945) (-1.037) (-0.476) TCJA*Leverage 0.0005 -0.0375*** 0.0186 -0.0084 (0.021) (-2.705) (0.646) (-0.417) TCJA*Property, Plant, and Equip. -0.0449** -0.0015 -0.0355 -0.0456* (-1.995) (-0.079) (-1.324) (-1.738) TCJA*NOL Indicator 0.0134 0.0230*** 0.0512*** 0.0164* (1.183) (3.626) (3.363) (1.720) Constant 0.3371*** 0.3060*** 0.2920*** 0.2862*** (73.885) (83.493) (48.339) (57.162)

Observations 12,708 21,865 12,708 21,865 R-squared 0.064 0.067 0.089 0.019 Controls Included Yes Yes Yes Yes Controls*Transition Year Included Yes Yes Yes Yes Cluster SE by Firm Yes Yes Yes Yes This table presents estimates of equation (1) for years 1995 to 2019 including an indicator variable TCJA equal to 1 for year-ends of December 31, 2018 or later an indicator variable Transition Year equal to 1 for year-ends from December 31, 2017 to November 30, 2018. Columns 1 and 3 present results for domestic firms, and columns 2 and 4 present results for multinational firms (MNC). Columns 1 and 2 (3 and 4) present results using GAAP ETR (Cash ETR) as the dependent variable. All main effects (no interaction) of the control variables are also included but suppressed for brevity. All interactions of the control variables and an indicator for the transition year are also included but suppressed for brevity. Coefficients are reported with t-statistics in parenthesis. ***, **, and * denote significance at a 1, 5, and 10 percent level for two-tailed test.

TABLE 6 Federal Rates of Taxation on U.S. Domestic and Foreign Income for U.S. MNC Firms.

(1) (2) Federal Foreign Dependent Variable Tax Expense Tax Expense

Domestic Income 0.2959*** 0.0043 (25.649) (1.340) Foreign Income 0.0635*** 0.2216*** (2.755) (14.561) TCJA -0.0166*** -0.0005 (-6.621) (-0.700) TCJA*Domestic Income -0.1306*** -0.0038 (-14.087) (-1.019) TCJA*Foreign Income -0.0046 -0.0173* (-0.387) (-1.845) Transition Year 0.0027 -0.0009 (1.217) (-1.590) Transition Year*Domestic Income -0.1352*** -0.0034 (-6.444) (-1.037) Transition Year*Foreign Income 0.2324*** -0.0206** (8.403) (-2.530) Constant 0.0240*** 0.0090*** (37.087) (26.968)

Observations 15,374 15,374 R-squared 0.721 0.572 Domestic (Foreign) Income*Controls Yes Yes TCJA(Transition Year)*Controls Yes Yes Clustered SE by Firm Yes Yes

This table presents results from estimating the following regression analysis and sample selection (also in Table 1) as first presented in Dyreng and Lyndsey (2009): Federal Tax Expenseit (Foreign Tax Expenseit) = q1Domestic Incomeit + j1Foreign Incomeit + g1Anti-abuseit + b1TCJAt + b2Transition Yeart + q2Domestic Incomeit*TCJAt + j2ForeignIncomeit*TCJAt + q3Domestic Incomeit*Transition Yeart + j3ForeignIncomeit*Transition Yeart + SqkDomestic Incomeit*Controlsit +SjkForeign Incomeit*Controlsit + SbkTCJAit*Controlsit +SbkTransition Yearit*Controlsit + eit. Where Federal Tax Expenseit equals federal current tax expense (TXFED), Foreign Tax Expenseit equals foreign current tax expense (TXFO), Domestic Income equals domestic income (PIDOM), and Foreign Income equals foreign income (PIFO). Controlsit include MNC with Tax Haven Firm (equal to one if the firm has a tax haven in any year), NOL (equal to one if the firm had a tax loss carryforward at the beginning of the year), Size (log of beginning of year total assets), DLTT (total long-term debt), XAD (advertising expense), and XRD (research and development expense), all measured at time t. All continuous variables (except for Size) are scaled by beginning of year total assets. As in Dyreng and Lyndsey (2009), we subtract the mean of all continuous independent variables to facilitate the interpretation of the coefficients. We include TCJA (as previously defined) and its interaction with all variables; and Transition Year (as previously defined) and its interaction with all variables. Coefficients are reported with t-statistics in parenthesis. ***, **, and * denote significance at a 1, 5, and 10 percent level for two-tailed test.

TABLE 7 Federal Rates of Taxation and the Effect of Anti-abuse Provisions.

Anti-abuse Measure 5-Year Lagged Foreign ETR Above Median Lagged PRE Balance (1) (2) (3) (4) Federal Tax Foreign Tax Federal Tax Foreign Tax Dependent Variable Expense Expense Expense Expense

Domestic Income 0.2960*** 0.0022 0.2955*** 0.0039 (25.698) (0.765) (25.584) (1.230) Foreign Income 0.0590** 0.2510*** 0.0638*** 0.2239*** (2.510) (18.587) (2.759) (14.238) TCJA -0.0165*** -0.0002 -0.0162*** -0.0014* (-6.624) (-0.246) (-6.507) (-1.735) TCJA*Domestic Income -0.1302*** -0.0021 -0.1299*** -0.0026 (-14.058) (-0.634) (-13.967) (-0.709) TCJA*Foreign Income -0.0069 -0.0060 -0.0047 -0.0330* (-0.466) (-0.615) (-0.242) (-1.843) Transition Year -0.0012 -0.0005 -0.0022 -0.0009 (-0.570) (-1.001) (-0.895) (-1.529) Transition Year*Domestic Income -0.1315*** -0.0032 -0.1274*** -0.0031 (-6.164) (-0.973) (-5.932) (-0.971) Transition Year*Foreign Income 0.0911*** -0.0086 0.0550 -0.0126 (2.853) (-0.784) (1.116) (-0.750) Anti-abuse 0.0067*** -0.0023*** 0.0069*** 0.0028*** (4.139) (-4.265) (3.592) (3.661) Anti-abuse *Foreign Income 0.0161 -0.0804*** -0.0099 -0.0468*** (1.514) (-10.208) (-0.905) (-5.396) TCJA*Anti-abuse -0.0014** 0.0000 -0.0009 -0.0017*** (-2.230) (0.021) (-1.317) (-3.668) Transition Year* Anti-abuse -0.0062*** -0.0003 -0.0061*** -0.0012** (-4.362) (-0.910) (-3.469) (-2.461) TCJA*Anti-abuse*Foreign Inc. -0.0052 -0.0092 -0.0053 0.0252 (-0.268) (-0.658) (-0.229) (1.241)

Transition Year*Anti-abuse*Foreign Inc. 0.1894*** -0.0063 0.1920*** -0.0015 (4.056) (-0.446) (3.128) (-0.079) Constant 0.0243*** 0.0097*** 0.0240*** 0.0090*** (36.550) (32.929) (36.940) (26.546)

Observations 15,374 15,374 15,374 15,374 R-squared 0.722 0.620 0.721 0.579 Domestic (Foreign) Income*Controls Yes Yes Yes Yes TCJA(Transition Year)*Controls Yes Yes Yes Yes Clustered SE by Firm Yes Yes Yes Yes

This table presents results from estimating the following regression analysis and sample selection (also in Table 1) as first presented in Dyreng and Lyndsey (2009): Federal Tax Expenseit (Foreign Tax Expenseit) = q1Domestic Incomeit + j1Foreign Incomeit + g1Anti-abuseit + b1TCJAt + b2Transition Yeart + q2Domestic Incomeit*TCJAt + j2ForeignIncomeit*TCJAt + q3Domestic Incomeit*Transition Yeart + j3ForeignIncomeit*Transition Yeart + g2Anti-abuseit*TCJAt + g3Anti- abuseit*Transition Yeart + g4Anti-abuseit*TCJAt + g5Anti-abuseit*Transitiont + j4Foreign Incomeit*Anti-abuseit + j5Foreign Incomeit*Anti-abuseit*TCJAt + j6Foreign Incomeit*Anti-abuseit*Transition Yeart + SqkDomestic Incomeit*Controlsit +SjkForeign Incomeit*Controlsit + SbkTCJAit*Controlsit +SbkTransition Yearit*Controlsit + eit. Where Federal Tax Expenseit equals federal current tax expense (TXFED), Foreign Tax Expenseit equals foreign current tax expense (TXFO), Domestic Income equals domestic income (PIDOM), and Foreign Income equals foreign income (PIFO). Controlsit include MNC with Tax Haven Firm (equal to one if the firm has a tax haven in any year), NOL (equal to one if the firm had a tax loss carryforward at the beginning of the year), Size (log of beginning of year total assets), DLTT (total long-term debt), XAD (advertising expense), and XRD (research and development expense), all measured at time t. All continuous variables (except for Size) are scaled by beginning of year total assets. As in Dyreng and Lyndsey (2009), we subtract the mean of all continuous independent variables to facilitate the interpretation of the coefficients. We include TCJA (as previously defined) and its interaction with all variables and Transition Year (as previously defined) and its interaction with all variables. Coefficients are reported with t-statistics in parenthesis. ***, **, and * denote significance at a 1, 5, and 10.