“Competitive Externalities of Tax Cuts” – by Dr. Petro Lisowsky
Dr. Petro Lisowsky
Associate Professor of Accounting
Questrom School of Business
We examine how tax cuts that benefit some firms are related to the economic performance of their direct competitors. Consistent with tax cuts decreasing the cost associated with initiating competitive strategies, we find that the decrease in the tax burden for only a certain group of firms in the U.S. economy has a negative economic effect on the performance of its direct competitors not directly exposed to the same tax cut. This negative externality is stronger when competitors face financial constraints, operate in more concentrated markets, and have similar products to their rivals. We also find that both investors and lenders price the negative externality manifested in these competitors’ economic performance.