The Uneasy Marriage of Export Incentives and the Income Tax

Abstract

This paper investigates the economic effect of tax incentives for American exports. These incentives include a partial tax exemption for export profits (available by routing exports through foreign sales corporations) and the allocation of some export profits to foreign-source income for purposes of U.S. taxation. The analysis highlights three important aspects of these policies. First, official figures appear to understate dramatically the tax expenditures associated with some U.S. export incentives. Correctly measured, total export benefits provided through the income tax are equivalent to a i-percent ad valorem subsidy. Second, the 1984 imposition of more rigorous requirements for obtaining export subsidies through foreign sales corporations is contemporaneous with a significant change in the pattern of U.S. exports. Estimates imply that the 1984 We thank Naomi Feldman, Renata Kosova, and Rachel White for excellent research assistance; Thomas Barthold,

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

“…Empirical work shows that tax rate decreases are associated with increases in aggregate corporate investment (Hassett and Hubbard []; Hassett and Newmark []) and firm employment (Giroud and Rauh []). The literature studying U.S. export subsidies (Kemsley []; Desai and Hines []) and related DPAD studies (Blouin, Krull, and Schwab []; Fich, Rice, and Tran []; Ohrn []; Dobridge, Landefeld, and Mortenson []) further suggests a positive relation between claiming the DPAD and the amount of domestic investment and employment in the post‐DPAD period. However, firms will forego domestic opportunities if instead the tax incentive results in higher prices for the same capital goods (Goolsbee []) or if U.S. labor and input costs exceed the tax benefit (Suarez Serrato and Zidar []).…”

Market reactions to export subsidies

“…For a more complete history of tax subsidies for U.S. exports, seeDesai and Hines (2001a), from which this section draws.…”

“…provides aggregate data on the use of FSCs in 1996. SeeDesai and Hines (2001a) for a detailed description and analysis of FSC rules that permitted some taxpayers to exempt from U.S. taxation a fraction greater than 15 percent of export income. 10 See the data reported byGrubert (2001).…”

“…The pattern of abnormal returns is almost identical to that of unadjusted returns.17 It is noteworthy that the $61 billion loss of aggregate stock market value on November 18, 1997 approximately equals the present value of the estimated $4 billion annual flow of FSC tax benefits to U.S. exporters, discounted at the prevailing 30-year AAA corporate bond rate of 6.84 percent. While $4 billion per year is a conservative estimate of FSC benefits (seeDesai and Hines, 2001a), and the benefits were likely to grow significantly over time, the WTO complaint by the European Union did not necessarily imply that the export benefits would be immediately or permanently removed.…”

Increasing Efficiency and Reducing Complexity in the Tax System in the United States

“…This appears to have led to an international reallocation of assets, with the percentage of assets of US manufacturing subsidiaries in countries where the average effective tax rate was less than 29 per cent rising to 80 per cent in 1996 from only 40 per cent in 1980. Overall, the tax breaks from the FSCs, deferred taxation on foreign earnings and other small benefits amounted to about one percent of the value of exports and 3¼ per cent of the pre-tax profits for manufacturing industry in 1996 (Desai and Hines, 2000).…”