Thesis title : Three Essays in Tax Policy , Macroeconomics , and Corporate Policies by Ruhollah Eskandari

This thesis consists of three essays addressing the impact of tax policy changes on the macroeconomic aggregates and also on the real and financial decisions of firms of different sizes. In the first chapter – “State-Dependent Macroeconomic Effects of Tax Changes: Estimates Based on Narrative Records in the U.S.”I provide evidence on the state-dependent macroeconomic effects of tax liability changes in the United States. I estimate a statedependent model where the state of the economy is measured by the amount of slack in the economy. We consider narrative approach to identify tax shocks and local projection technique to calculate impulse responses. Our estimates show that linear responses are being about half-way between the large estimated responses during good times and the much smaller effects and not significantly different from zero during bad times. This suggests that, while the identified tax shocks based on narrative records are indeed unrelated to the state of the economy, the macroeconomics effects of the shocks are different depending on the state of the economy. Results are shown to be robust to many alternative specifications. We also find that the effects of tax changes depend on whether the tax changes are tax-cuts or tax-increases. Those tax cuts taken to stimulate long-run growth are more likely to increase growth and reduce deficits in good times than bad times, but instead, tax increases taken to deal with an inherited budget deficit have strong effect on deficit reduction during bad times. Second chapter – “Tax Policy and Investment Behavior of Small and Large Firms” (joint with Morteza Zamanian) investigates the role of size in firms’ responses to exogenous tax changes over the post-WWII period. Using the US Census Bureau, Quarterly Financial Report (QFR) data and employing a local projection method, we find that both small and large firms respond to exogenous corporate income tax cuts by boosting investment. However, large businesses relatively contribute higher share of aggregate changes of business investment. We also explore firms financing behavior in such occurrences. Perhaps the most controversial result of this paper is the responses of cash holding to tax policy changes. Despite the fact that small firms hold relatively more cash (cash to asset) than large firms, and then one would expect that small firms use their cash when investment opportunities arrive, instead, our finding show that large firms rely more heavily on cash to finance investment. In addition, while both firms increase their use of external financing, small firms rely more on debt to finance investment. In fact, cash reserves of large firms appear to be a strong substitute for debt in response to a corporate tax cut. “Dynamics of Cash Holding: Evidence from U.S. Manufacturing Firms 1956-2014” (joint with Morteza Zamanian) is the last chapter of this dissertation which explores the long-run dynamics of corporate cash holding using a novel dataset of U.S. manufacturing firms. The results mirror previous empirical findings of increasing cash-to-asset ratio from the 1980s onwards. However, looking at a longer horizon we show that the trend of the cash ratio has been roughly U-shaped since 1955. To explain this fact, we review alternative theories of cash holding dynamics and show that cash flow volatility theory is the unique theory which can explain evolution of the cash ratio over the past six decades. In addition, using this dataset we show that the aggregate dynamics of cash holding is not driven by a particular size class of firms. Chapter 1 State-Dependent Macroeconomic Effects of Tax Changes: Estimates Based on Narrative Records in the U.S. This chapter provides evidence on the state-dependent macroeconomic effects of tax liability changes in the United States. We estimate a state-dependent model where the state of the economy is measured by the amount of slack in the economy. Our estimates show that linear responses are being about half-way between the large estimated responses during good times and the much smaller effects and not significantly different from zero during bad times. This suggests that, while the identified tax shocks based on narrative records are indeed unrelated to the state of the economy, the macroeconomics effects of the shocks are different depending on the state of the economy. In addition, we find that the effects of tax changes also depend on whether the tax changes are tax-cut or tax-increase. Tax cuts are more likely to increase growth and reduce deficits in good times than bad times, but instead, tax increases have strong effect on deficit reduction during bad times.