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The Uneasy Marriage of Export Incentives and the Income Tax

In: Tax Policy and the Economy, Volume 15

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  • Mihir A. Desai
  • James R. Hines, Jr.

Abstract

This paper investigates the economic impact 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 one percent ad valorem subsidy. Second, the 1984 imposition of more rigorous requirements for obtaining tax benefits through Foreign Sales Corporations is contemporaneous with a significant change in the pattern of U.S. exports. Estimates imply that the 1984 changes reduced U.S. manufacturing exports by 3.1 percent. Third, there were significant market reactions to the 1997 event in which the European Union charged that U.S. income tax provisions are inconsistent with World Trade Organization rules prohibiting export subsidies. Filing of the European complaint coincides with a 0.1 percent fall in the value of the U.S. dollar and steep drops in the share prices of major American exporters.

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This chapter was published in:

  • James M. Poterba, 2001. "Tax Policy and the Economy, Volume 15," NBER Books, National Bureau of Economic Research, Inc, number pote01-1, July.
    This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 10854.

    Handle: RePEc:nbr:nberch:10854

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    References

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    1. Altshuler, R. & Newlon, T.S., 1991. "The Effects of US Tax Policy on the Income Repatriation Patterns of US Multinational Corporations," Discussion Papers 1991_60, Columbia University, Department of Economics.
    2. John Mutti & Harry Grubert, 1984. "The Domestic International Sales Corporation and Its Effects," NBER Chapters, in: The Structure and Evolution of Recent U.S. Trade Policy, pages 279-320 National Bureau of Economic Research, Inc.
    3. Hines, J.R. & Rice, E.M., 1990. "Fiscal Paradise: Foreign Tax Havens And American Business," Papers 56, Princeton, Woodrow Wilson School - Discussion Paper.
    4. Hines, J.R.J. & Hubbard, R.G., 1989. "Coming Home To America - Devidend Repatriations By U.S. Multinationals," Papers 146, Princeton, Woodrow Wilson School - Public and International Affairs.
    5. Hines, James R. Jr., 1999. "The Case against Deferral: A Deferential Reconsideration," National Tax Journal, National Tax Association, vol. 52(n. 3), pages 385-404, September.
    6. Rosanne Altshuler, 1995. "Do Repatriation Taxes Matter? Evidence from the Tax Returns of U.S. Multinationals," NBER Chapters, in: The Effects of Taxation on Multinational Corporations, pages 253-276 National Bureau of Economic Research, Inc.
    7. Sawyer, W. Charles & Sprinkle, Richard L., 1997. "The Demand for Imports and Exports in Japan: A Survey," Journal of the Japanese and International Economies, Elsevier, vol. 11(2), pages 247-259, June.
    8. Donald J. Rousslang & Stephen P. Tokarick, 1994. "The Trade and Welfare Consequences of U.S. Export-Enhancing Tax Provisions," IMF Staff Papers, Palgrave Macmillan, vol. 41(4), pages 675-683, December.
    9. Kimberly A. Clausing, 2000. "The Impact of Transfer Pricing on Intrafirm Trade," NBER Chapters, in: International Taxation and Multinational Activity, pages 173-200 National Bureau of Economic Research, Inc.
    10. Assaf Razin & Joel Slemrod, 1990. "Taxation in the Global Economy," NBER Books, National Bureau of Economic Research, Inc, number razi90-1, July.
    11. James R. Hines Jr., 1992. "Credit and Deferral as International Investment Incentives," NBER Working Papers 4191, National Bureau of Economic Research, Inc.
    12. Alberto Giovannini & R. Glenn Hubbard & Joel Slemrod, 1993. "Studies in International Taxation," NBER Books, National Bureau of Economic Research, Inc, number giov93-1, July.
    13. Grubert, Harry, 1998. "Taxes and the division of foreign operating income among royalties, interest, dividends and retained earnings," Journal of Public Economics, Elsevier, vol. 68(2), pages 269-290, May.
    14. Hines, James R. Jr., 1999. "Lessons from Behavioral Responses to International Taxation," National Tax Journal, National Tax Association, vol. 52(n. 2), pages 305-22, June.
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    Cited by:
    1. Ronald B Davies, 2010. "The Silver Lining of Red Tape," Working Papers 201018, School Of Economics, University College Dublin.
    2. Limao, Nuno & Panagariya, Arvind, 2007. "Inequality and endogenous trade policy outcomes," Journal of International Economics, Elsevier, vol. 72(2), pages 292-309, July.
    3. Nuno Limão & Arvind Panagariya, 2003. "Why is there an Anti-trade Bias in Trade Policy?," International Trade 0310003, EconWPA.
    4. Mihir A. Desai & James R. Hines Jr., 2004. "Market Reactions to Export Subsidies," NBER Working Papers 10233, National Bureau of Economic Research, Inc.
    5. Passas, Nikos, 2005. "Lawful but awful: 'Legal Corporate Crimes'," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 34(6), pages 771-786, December.

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