Prior to 2018, U.S. multinational corporations faced a repatriation tax on foreign profits they chose to send home to their U.S. parent. As a result, many corporations chose to defer this tax and accumulate overseas profits within their foreign subsidiaries, with the hope of a future tax holiday or reform. That day came in late 2017 with the passage of the Tax Cuts and Jobs Act (TCJA), the signature tax bill of the Trump administration. Among other significant provisions, the new law substantially reduced the repatriation tax rate on these accumulated foreign profits. The change gave corporations immediate access to at least $1.7 trillion in previously considered “trapped cash”.

What did corporate executives do with this newfound liquidity? Proponents of the TCJA suggested that this would spur investment and hiring in the U.S. by providing access to cheap capital. Others argued that the reform was simply a tax break to shareholders who would see increased equity payouts.

Using detailed confidential data from the U.S. Bureau of Economic Analysis, we estimate the response in firms’ real business activity and financial decisions to this sizable liquidity shock. In short, we find no evidence that companies responded to the increased access to cheap capital by increasing investment in the U.S. as measured by capital expenditures, wage expense, R&D, and M&A. Instead, executives increased payouts to shareholders. For every dollar freed by the reform, about 30 cents was paid out to shareholders over the next two years, primarily through share repurchases.

However, despite an increase in shareholder payouts, much of the residual freed cash—about 48 cents on the dollar—was simply retained inside the firm, not used for investment nor payouts. No longer restricted by tax penalties, why didn’t these firms pay out more?

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