Tax Policy Expectations and Firm Behavior: Evidence from the 2016 U.S. Election and the Tax Cuts and Jobs Act

We examine how beliefs about tax policy affect firms’ investment decisions. Exploiting the periods around the surprise election of Donald Trump, who campaigned heavily on tax reform, and the Tax Cuts and Jobs Act (TCJA), we find that expectations regarding tax policy have both first-moment (sentiment) and second-moment (uncertainty) effects on investment, which vary heterogeneously across events and firms. In particular, we document that tax policy sentiment (uncertainty) enhances (dampens) the change in investment around the passage of the TCJA, suggesting that these beliefs affect the ability of tax reforms to spur economic growth.