When Congress in 2017 changed a tax provision that for decades had allowed companies to deduct 100% of their research and development expenses each year, Stanford Graduate School of Business professor Rebecca Lester took note of the move as “horrible policy.” But she didn’t spend a lot of time thinking about the change. It was designed to offset the cost of tax cuts elsewhere in President Donald Trump’s Tax Cuts and Jobs Act, and its implementation was delayed until 2022. The expectation in the business community was that lawmakers would reverse the provision before then.
Then, in 2023, when Lester was preparing to teach her MBA-level Taxes and Business Strategies class, she noticed a huge jump in the taxes on R&D on a corporate financial statement. “It went from $0 to $17 billion — for one company,” she recalls.
Two students later sent her news articles about the provision — which requires entities to amortize their deductions over a five-year period — and others who were starting their own businesses said they owed taxes they never expected to pay because of the change.
Lester decided to look more closely at the provision and its impact with a pair of coauthors. Their findings, revealed in a recent working paper, show the real-world consequences of a cavalier accounting maneuver: a more than $14 billion reduction in R&D investment among domestic and research-intensive firms in the provision’s first year alone. Firms also cut their spending in other areas to compensate for their increased tax bills.
Basically, Lester says, the provision “undermined historical policy” in the United States to encourage innovation and investment even as subsequent laws, such as the 2022 CHIPS and Science Act, tried to spur on R&D. “A lot of corporate executives said it was like the government was giving with one hand and taking away with the other,” Lester says. “It’s a very disjointed policy.”
For Lester, who earned her undergraduate and graduate degrees in accounting, the policy is also a fascinating example of why she left a successful career in tax consulting and mergers and acquisitions to pursue academia: The chance to conduct cutting-edge research on timely topics in her field.
“I love accounting,” she says, “and I also love politics. Tax is the intersection of the two.”
Accounting comes naturally to Lester. Her father was a professor in the field, her mother was also a professor whose work focused on the textile industry in their home state of North Carolina, and dinner conversations often revolved around the subject. After graduating from the University of Tennessee in 2002, where her senior honors thesis explored the lobbying that surrounded the Tax Reform Act of 1986, Lester took a job at Deloitte in its tax services practice and later helped open the firm’s India office. From 2005 to 2010, she was a manager in Deloitte’s M&A practice before deciding to go back to school for personal and professional reasons, including a desire to dive deeper into the behaviors she was seeing among her clients.
“A lot of my clients were using mergers to move out of the United States, sometimes for tax reasons,” she explains. She found the decisions fascinating, but “consulting didn’t provide opportunities to study the broader economic effects of these choices.”
Lester decided to earn a PhD in accounting at MIT, studying with Michelle Hanlon, who had recently joined the school. “It was super fortuitous,” Lester recalls. “She had a background that was quite similar to me and was — and continues to be — this amazing, incredible scholar.”
The transition was tough for Lester, who hadn’t taken a math class since she had placed out of them in her first year in college and was suddenly a student at a top university known for its math and sciences programs. “I had been out of the classroom for a long time,” she laughs. “I felt like a fish out of water.”
But she soon found her way. Her first project, coauthored with Hanlon and MIT’s Rodrigo Verdi, looked at some of the same practices she had seen in her work at Deloitte. She wrote her dissertation on a provision of the American Jobs Creation Act of 2004 designed to encourage domestic manufacturing.
Hanlon says Lester initially stood out as being “super personable.” Because she had come from practice, she didn’t have a body of research to assess, but she asked good questions and had good ideas about how to get answers. “Curiosity will take you a long way in this job,” Hanlon says. “I think that was key.”
In 2015, Lester joined the Stanford GSB faculty, in part because of the opportunities for interdisciplinary research. She now leads the Stanford Initiative for Business, Taxation, and Society, along with GSB professors Joshua D. Rauh and Juan Carlos Suárez Serrato.
Lester is an empirical accounting researcher who studies the role of corporate reporting and tax policies on companies’ investment and employment decisions. “When I started, I was looking at what I was seeing in practice and asking, how did that apply in these economic frameworks?” she says. “How does tax affect where companies locate, hire workers, and invest?”
Her research has explored the effects of international tax laws, including how a series of tax cuts in the United Kingdom led to increased investment by the UK in sub-Saharan Africa; and decisions by countries to provide tax incentives to promote innovation.
Domestically, she has studied how politics affected the creation of Opportunity Zones, another element of the 2017 Tax Cuts and Jobs Act aimed at catalyzing economic development in financially distressed areas (governors were more likely to confer the designation to locations that were politically aligned with them), and tax avoidance strategies in the initial public offering process.
Lester wasn’t sure what her research into the amortization of R&D deductions would uncover — perhaps companies had put off making any drastic changes in the hopes that Congress would repeal the provision. Even though, on average, firms did not decrease their R&D spending, there were significant reductions in two important groups: domestic-only firms whose R&D expenses are entirely in the United States and research-intensive firms.
Specifically, the authors estimate that the 176 domestic-only firms in their study reduced R&D by $13 million each, or more than $2 billion total. Among the more than 200 research-intensive firms in the sample, R&D investment declined by an estimated 12%, or nearly $60 million per firm, totaling $12.2 billion.
Even among what they call “unconstrained firms,” there are consequences, the authors find. Although R&D spending did not decline among such companies, Lester and her colleagues find that they reduced share repurchases and decreased other capital expenditures as well.
Overall, the elimination of the R&D deduction — a temporary move meant to make the math work on paper for political reasons — substantially increased the tax burdens of affected U.S. firms.
In another new paper, Lester worked with a team of coauthors, including Stanford Law professor Daniel E. Ho and a government partner at the Internal Revenue Service to study the tax implications of partnerships, which vastly outnumber public firms in the United States.
Their paper on “the spiderweb” of partnership tax structures is unique in several ways: First, it provides novel descriptive evidence about partnership-related businesses and shows that pursuing PRBs through audits would lead to a greater return on the U.S. government’s investment in tax enforcement. “We’re cracking open this huge black box about who these businesses are,” Lester explains.
The authors focus on more than seven million partnerships between 2013 and 2015, identifying every owner until the ultimate tax-paying entity is identified. Visually, the work is striking: Figure 2, a sample of 10,000 PRBs in the appendix, with different colors assigned to different industries and dots of different sizes representing the complexity of the business structure, looks like something that might hang on the wall of a modern art museum.
This figure presents 10,000 partnership-related businesses studied by Lester and her colleagues. A dot’s size indicates the complexity of the partnership; its industry is represented by color. Partnerships closer to the center of the figure are owned by taxpayers who own more additional partnerships. | Courtesy
Lester and her coauthors find that, although IRS agents often close audits of complex PRBs without assessing penalties and more quickly than those of simple partnerships, they should take their time: The return on investment for such audits is $20 for every $1 spent, a rate over eight times the return on investment for auditing corporations.
“If you invest the time” in auditing complex partnerships, Lester says, “the return, in terms of how much money you are going to generate, is actually very high.”
Lester says the opportunity to work on the project with Ho, who runs Stanford’s Regulation, Evaluation, and Governance Lab, was a “moonshot.” “This is such a great example of cross-disciplinary work,” she says. And the findings are still coming. “This is one paper,” she laughs. “There are already two more papers behind it.”
Lester’s work is always policy-driven. The R&D and partnership papers, in particular, show what’s at stake when lawmakers and regulators make decisions and the substantial room for improvement in U.S. tax policy and enforcement.
Whether any actual improvements will be forthcoming remains to be seen. Republicans have tried to claw back additional money allotted to the IRS for enforcement actions under President Joe Biden, and so far, bipartisan efforts to repeal the provision requiring amortization of R&D deductions have failed. Meanwhile, the 2017 tax cuts are expiring, and if Republicans want to restore them as they take the reins of government, they will have to find money somewhere.
“People say 2025 is going to be like the Super Bowl of tax,” Lester says. “For someone like me, it’s the most exciting time possible.”
Over the years, Lester’s work has also evolved to focus on state and local laws that drive corporate decision-making. With Rauh and Natalie Millar, a Hoover Institution fellow and Alabama native, she has been working on a study of nearly 3,300 business incentives in Alabama between 2012 and 2020, nearly all of which have not previously been reported in academic literature. Tracking down the data was an enormous feat, requiring help from Millar’s former economic development colleagues and, eventually, a state law — the Transparency in Incentives Act — passed in 2023.
“One of the things I found in earlier work is that transparency [around incentives] is just quite low,” Lester says. “We don’t, as citizens, have a really good sense about the amount of incentives that are given. Alabama is leading the effort to help increase transparency and support our research focused on studying the effectiveness of incentives in job creation.
Lester and Millar’s work may help explain why prior studies on economic incentives have yielded mixed results. Furthermore, through their work with the Hoover Institution’s State and Local Governance Initiative, they are in touch with several states about improving transparency and conducting research on the effectiveness of incentive programs.
Millar describes Lester as “one in a million.” “I call her a unicorn,” she says. “There are professors who are really good at research, professors who are really good at teaching, and professors who are really good at service. It’s very rare that professors are good at all three.”
Millar says Lester has helped her hone her research questions and improve her ability to communicate her ideas to various audiences. She and Lester stayed up until 3 a.m. one night preparing a presentation to convince local economic development agencies in Alabama to consider participating in their research. “She will put just as much into you as you put into her,” Millar says.
Lester explains she had “amazing mentors,” including Hanlon, and that it is a “joy to get to do that for others. I learn so much from my students.”
Impact is also a major motivation for her work. “I have the best job,” Lester says. “Understanding how a policy impacts companies is something I was really curious about at Deloitte and now I get to study that at an amazing institution where I can get the best data possible to get the best answer possible. I know this work can directly impact a community or some policy. That’s the part that keeps me excited and engaged.”
Photos by Elena Zhukova
