Did the 2003 Tax Act increase Capital Investments by Corporations?

On May 28, 2003, Congress enacted the Jobs and Growth Tax Relief Reconciliation Act of 2003 (2003 Tax Act), which reduced shareholder-level taxes on dividends and capital gains. If reductions in shareholder-level taxation reduce firms' cost of capital, then corporate investment should increase after the 2003 Tax Act. Our empirical analysis yield three main results. First, we find that capital expenditures increase by 14.8 percent after the 2003 Tax Act became effective. The mean (median) firm in our sample increases capital expenditures by $33 million ($22 million). Second, we find that the increase in capital expenditures is smaller for firms largely held by institutional investors. This suggests that the finding of increased capital expenditures is associated with the 2003 Tax Act, since institutional investors do not generally pay shareholder-level taxes and thus the tax rate reduction does not apply to them. Finally, we find that a majority of other forms of investment respond to the 2003 Tax Act in the same manner as capital expenditures. Specifically, we use intangible assets, human capital, working capital, goodwill, research and development expenses, and acquisitions as alternative measures of corporate investment. Taken together, our results suggest that the 2003 Tax Act increased corporate investment and add further evidence that shareholder-level taxes impact firm value.