Trade policy × corporate decisions

When tariffs rose, the corporate tax gap widened. Then the relationship almost disappeared.

Evidence from large U.S. firms before and after the 2017 Tax Cuts and Jobs Act.

Trade-Policy Exposure and Managerial Adjustment Margins: Regime-Dependent Evidence from Corporate Tax-Base Outcomes

Article DOI10.1002/mde.70150

Accepted14 August 2026

Explore the Evidence

WILEY Managerial and Decision Economics

Research Article

Trade-Policy Exposure and Managerial Adjustment Margins: Regime-Dependent Evidence From Corporate Tax-Base Outcomes

Garros Gong · Stanko Dimitrov

Department of Management Sciences · University of Waterloo

Journal Managerial and Decision Economics

Article DOI 10.1002/mde.70150

Accepted 14 August 2026

The empirical puzzle

The relationship changed after the TCJA

+2.008 Pre-TCJA tariff-gap association

−1.995 Post-TCJA attenuation

≈ 0.013 Net association after 2018

Before the TCJA, greater tariff exposure coincided with a wider corporate tax gap. After 2018, the relationship was largely muted.

Corporate tax gap = statutory tax rate − effective tax rate

Who had more room to adjust?

Geographic scope matters

The tariff-gap relationship was stronger among firms whose sales were spread across more geographic segments.

+0.445 Tariff exposure × geographic diversity

−0.655 Post-TCJA attenuation

A multi-margin response

One shock, multiple adjustment margins

◎ Trade-policy pressure

▥ Operating margins

▤ Internal tax-base margin

Before TCJA

After TCJA

Firms may allocate adjustment across operating and internal tax-base margins when both remain available.

Empirical design

Quarterly panel and identification diagnostics

▣2010–2024Sample period

●●16,499Firm-quarter observations

▥298Large U.S. firms

▱3Exposure tiers

Bloomberg • U.S. tariff series • Compustat geographic segments • firm fixed effects

Specification stability Lead–lag structure and alternative controls⌄

1.581 Current association with year-quarter FE

−1.458 Post-TCJA attenuation with year-quarter FE

0.459 Lead becomes insignificant (p = 0.401)

1.761 / −1.435 Current / attenuation with exposure-tier trend

Policy extension

What could this mean for tax-setting?

In a calibrated tax-setting exercise, different revenue and capital-retention priorities imply different statutory rates.

$Revenue Critical48.3%

⚖Balanced20.1%

↗Growth Focused17.2%

◎Trade War Mitigation16.7%

Illustrative scenario mapping, not a policy recommendation.

Mechanism and implications

How policy pressure moves across adjustment margins

The evidence is consistent with a regime-dependent allocation of adjustment across operating and internal tax-base margins.

01 · Shock incidence

Trade-policy pressure

Higher tariff exposure raises the operating burden faced by the firm.

02 · Operating margin

Visible operating adjustment

The immediate response set is operational. Firms can absorb part of the policy shock through several decision margins.

Sourcing Pricing Production

Primary visible response set

03 · Margin allocation

Internal tax-base margin

When available, the tax-base margin provides an additional channel for reallocating adjustment.

Additional internal margin

04 · Institutional constraint

Post-TCJA attenuation

The post-2018 coefficient compression is consistent with a narrower internal adjustment margin.

Regime attenuation

Cross-policy incidence

Trade shocks can surface beyond operating accounts.

The tariff-gap association indicates that incidence may extend into tax-base outcomes when internal adjustment capacity remains available.

Tax-rule interaction

Tax institutions alter the feasible adjustment set.

The post-TCJA attenuation suggests that tax rules can change how strongly a non-tax policy shock maps into internal fiscal margins.

Organizational scope

Geographic breadth is associated with adjustment capacity.

Firms spanning more geographic segments show a stronger pre-TCJA tariff-gap relationship, consistent with more available internal margins.

Policy-mix design

Policy instruments meet inside the same firm response.

Trade policy and corporate tax design should be evaluated jointly when both affect the margins through which firms absorb regulatory pressure.