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The Business Cycle and the Deduction for Foreign Derived Intangible Income: A Historical Perspective

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  • Tim Dowd
  • Paul Landefeld

Abstract

Public Law 115-97, commonly known as the Tax Cuts and Jobs Act, was passed at the end of 2017 and drastically altered the taxation of corporate income with fundamental changes to the treatment of cross-border income flows. We focus on the potential impact of one particular provision, the deduction for Foreign Derived Intangible Income (FDII) which provides a deduction for high return income derived from exports of goods and services. We form a historical panel of corporate tax returns and simulate the deduction for FDII had it been in place from 2000-2015. We find that the deduction would have provided significant benefits, particularly to firms in the manufacturing, information, and professional services sectors. We find these benefits to be highly concentrated. In addition, we find that deemed intangible income (DII) is pro-cyclical in nature - declining significantly as a share of income during recessions. The deduction for FDII exacerbated the pro-cyclical nature of DII during the 2001 recession, whereas during the Great Recession, exports moderated the pro-cyclical nature of FDII.

Suggested Citation

  • Tim Dowd & Paul Landefeld, 2018. "The Business Cycle and the Deduction for Foreign Derived Intangible Income: A Historical Perspective," National Tax Journal, National Tax Association;National Tax Journal, vol. 71(4), pages 729-750, December.
    • Handle: RePEc:ntj:journl:v:71:y:2018:i:4:p:729-750
    DOI: 10.17310/ntj.2018.4.07
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    Cited by:

    1. Sebastian Beer & Mr. Alexander D Klemm & Ms. Thornton Matheson, 2018. "Tax Spillovers from US Corporate Income Tax Reform," IMF Working Papers 2018/166, International Monetary Fund.
    2. Mindy Herzfeld, 2021. "Designing international tax reform: lessons from TCJA," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 28(5), pages 1163-1187, October.
    3. Mr. Nigel A Chalk & Mr. Michael Keen & Ms. Victoria J Perry, 2018. "The Tax Cuts and Jobs Act: An Appraisal," IMF Working Papers 2018/185, International Monetary Fund.

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