Taxes, regulations, and the value of U.S. corporations: A reassessment

Abstract

This paper reassesses the conclusions of McGrattan and Prescott (2005), which derived the quantitative implications of growth theory for U.S. corporate valuations. In addition to having two more decades of data, the analysis incorporates recent changes in policies that affect corporate investments, taxes, and legal-form choice. Secular trends identified in the earlier period remain, with little change in the tangible capital-output ratio or profit share of output. Corporate valuations remain high relative to the postwar average, in line with the theoretical prediction. Critical to this prediction are the decline in effective tax rate on distributions and the rise of foreign direct investment abroad. With the recent enactment of the Tax Cuts and Jobs Act, corporate valuations are predicted to rise even further relative to GDP.