The U.S. “2017 Tax Cuts & Jobs Act” introduces a significant data error in corporate net cash flow

Abstract

A recent one-time accounting “repatriation tax” charge against a leading cash flow series (e.g., Federal Reserve Economic Data series, Corporate Net Cash Flow with Inventory Valuation Adjustment) introduces a significant change in 4 ${}^{\text{th}}$ Quarter, 2017 that is an accounting artifact. This note demonstrates the econometric impact of the charge and illustrates how to back it out resulting in a series consistent with economic activity. Without the proposed adjustment, the series has what is essentially a permanent outlier that is of such magnitude that it can distort regression coefficients and statistical models when the 4 ${}^{\text{th}}$ Quarter, 2017 datapoint is included in analysis.