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Tax law led to increase in pension-plan contributions in 2017: study

Tax law led to increase in pension-plan contributions in 2017: study
© Greg Nash

Companies substantially increased their contributions to defined-benefit pension plans in 2017, likely because of the new tax law that President TrumpDonald John TrumpTrump to fundraise for 3 Republicans running for open seats: report Trump to nominate former Monsanto exec to top Interior position White House aides hadn’t heard of Trump's new tax cut: report MORE signed in December, according to a new paper from researchers at the University of Wisconsin-Madison.

The tax law cuts the corporate tax rate from 35 to 21 percent, starting in 2018. The rate reduction provided an incentive for corporations to boost their deductions in 2017 — including the deduction for pension contributions — so that they can take those deductions at the higher rate.

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“Firms contributed more to their pensions in 2017 because they could get a tax deduction at 35 percent,” said Dan Lynch, one of the authors of the study.

The researchers looked at a sample of 414 nonfinancial firms that do their financial statements on a calendar-year basis.

They found that on average, the firms increased their unexpected pension contributions by $16 million each. Unexpected pension contributions are defined as the difference between the amount a firm contributed and the amount it said it is expected to contribute on prior-year financial statements.

Firms on average increased their contributions by about 24 percent in 2017, compared to their average from 2014 to 2016, the researchers found.

The researchers also found that taxpaying firms made larger unexpected pension contributions than nontaxpaying firms, signaling that the increase in contributions could be due to the cut in the corporate tax rate.

"Our findings suggest the reduction in the corporate tax rate incentivized firms to increase pension contributions, resulting in a wealth transfer from capital to labor," the researchers wrote in their paper. "Importantly, this was not a primary consideration in the decision to lower the corporate tax rate. Our results suggest a potential unintended consequence of the rate reduction."