Debt and Taxes? The Effect of Tax Cuts & Jobs Act of 2017 Interest Limitations on Capital Structure

ABSTRACT The Tax Cuts & Jobs Act of 2017 (TCJA) limited interest deductibility. Using a difference-in-differences design, we show that following the enactment new limitations, affected firms significantly decrease their leverage. Specifically, find relative to unaffected U.S. firms, leverage by 7.6 percent assets, corresponding $330 million per firm and $84.8 billion for treatment sample. These results are driven decreases in long-term domestic debt declines issuances rather than repayment. Additional tests indicate other tax reform elements do not explain results. We also currently subject limitations on but future about half as much limits. Overall, our findings document an economically significant effect recent behavior advance understanding how taxes affect capital structure. JEL Classifications: H26; H71; H72.