Made in the U.S.A.? A Study of Firm Responses to Domestic Production Incentives

Abstract

How do U.S. companies respond to incentives intended to encourage domestic manufacturing? I study the Domestic Production Activities Deduction (DPAD), which was enacted in the American Jobs Creation Act (AJCA) of 2004 and was the third largest U.S. corporate tax expenditure as of 2017. Using confidential data from the U.S. Bureau of Economic Analysis, I find greater average domestic investment spending of $95.5–$143.6 million, but only within the sample of domestic‐only firms and not until 2010, when the greatest statutory DPAD benefits were available. Additional evidence suggests that U.S. multinational claimants invest abroad rather than in the United States and that the increased investment by DPAD firms is accompanied by a reduction in the domestic workforce, consistent with a substitution of capital for labor. I also show that the delayed investment response is due to firms engaging in other responses first, such as changing corporate reporting to shift income across time and borders. Quantifying the extent of these effects contributes to the literature that studies this tax deduction and informs policy makers as to the effectiveness of both manufacturing incentives and U.S. corporate income tax rate reductions in stimulating real domestic activity.

Tax Competition and Employment

“…Because these exports ultimately appear as imports into other countries, this finding suggests that changes in foreign tax rates can affect the competitive environment in other countries via the import competition channel. Consistent with Lester (2019) and De Vito et al…”

“…For example, Boutin et al (2013) find that multinationals transfer cash to subsidiaries facing potential market entrants when their headquarters' tax rates are relatively lower. Further, Lester (2019) finds that lower home-country tax burdens cause US multinationals to invest in subsidiaries located abroad. Similarly, Hoopes et al (2022) find that UK multinational firms increase their investments in subsidiaries located abroad after the UK significantly lowered the domestic corporate income tax rate.…”

“…Foreign tax rate changes can cause domestic managers to alter their firms' employment levels by changing the domestic competitive environment. For example, foreign tax rate changes can affect whether the managers of foreign firms invest in marginal projects, which can result in new products and production improvements (e.g., Djankov et al, 2010;Mukherjee et al, 2017;Lester, 2019). These investment changes can directly affect the competitive environment in other countries by changing import competition and changing competition from local competitors crosssubsidized by foreign parents.…”

The Effect of Corporate Taxation on Investment and Financial Policy: Evidence from the DPAD

“…The return on the investment net of depreciation and borrowing costs is taxed at the DPAD-adjusted corporate income tax rate, τ c (1 − d ) , where d is equal to the DPAD rate for domestic manufacturing firms and 0 for firms do not generate income via domestic manufacturing activities. 7 Understanding the potential sources of financing, their costs, and the firm's production functions, the maximand can be rewritten as…”

Do Corporate Tax Cuts Increase Income Inequality?

“…He finds that income inequality increased following the expansion of states' capacities to tax personal income. Finally, our paper is related to the literature that investigates the role of corporate tax deductions in stimulating the real economy (e.g., Lester (2019)).…”