The effect of tax cuts and jobs act on corporate debt ratios

The Tax Cuts and Jobs Act (TCJA), effective on December 22, 2017, is the most comprehensive overhaul of the U.S. tax code in the last 30 years. Historically, when corporate tax rates are high, the interest deduction on debt is greater, thereby reducing firms’ taxable income. However, with the new reforms significantly reducing corporate tax rates, the deductibility of the interest is no longer as favorable. In this paper, the effect of the TCJA on corporate debt ratios is analyzed. The authors hypothesize that corporate debt ratios have decreased since the passage of the TCJA.  The results of the paper support our hypothesis that the long-term debt ratio is significantly negatively related to the implementation of the TCJA.   Key words: Tax cuts and jobs act; corporate tax; debt ratio; short-term debt; long-term debt.