Corporate responses to the repatriation incentives and domestic production activities deduction

The 2004 American Jobs Creation Act (AJCA or the Act) sought to encourage U.S. companies to repatriate foreign earnings and invest them domestically in an effort to increase capital spending and employment. This investigation looks at how the two tax provisions in AJCA, i.e., the repatriation tax holiday and the domestic production activities deduction (DPAD), affected domestic investment and payout behaviors. An examination of repatriating firms based on the tightness of their capital constraints shows that the tax incentives fail to induce non-constrained, repatriating firms that benefit from DPAD to reinvest the capital domestically. Only capital-constrained, repatriating firms benefitting from DPAD increase domestic investment and reduce share repurchases; however, these firms also increase their cash dividend payments. The findings should be useful to policymakers as they consider modifying the corporate tax structure to increase domestic investment by encouraging U.S. firms to repatriate foreign earnings and reinvest them domestically.