The Role of Tax Rules in the Recent Restructuring of US Corporations

US tax reforms in the 1980s have changed substantially the relative attractiveness of operating in partnership form relative to corporate form. They have also changed the desirability of debt financing relative to equity financing, both of domestic operations and of foreign subsidiaries. And whereas the 1981 Tax Act encouraged mergers and acquisitions among US corporations, the 1986 Act discouraged such transactions. Moreover, these Acts had the opposite effect on incentives of foreign companies to acquire US businesses. In this paper, we attempt to show that these apparently disparate claims are all implied from a common (and simple) framework. Moreover, we present empirical evidence to support the claims.