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The Uneasy Marriage of Export Incentives and the Income Tax

Author

Listed:
  • 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.

Suggested Citation

  • Mihir A. Desai & James R. Hines Jr., 2000. "The Uneasy Marriage of Export Incentives and the Income Tax," NBER Working Papers 8009, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:8009
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    References listed on IDEAS

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    1. Assaf Razin & Joel Slemrod, 1990. "Taxation in the Global Economy," NBER Books, National Bureau of Economic Research, Inc, number razi90-1, June.
    2. Horst, Thomas & Pugel, Thomas, 1977. "The impact of disc on the prices and profitability of U.S. exports," Journal of Public Economics, Elsevier, vol. 7(1), pages 73-87, February.
    3. James R. Hines, Jr. & R. Glenn Hubbard, 1990. "Coming Home To America: Dividend Repatriations By U.S. Multinationals," NBER Chapters,in: Taxation in the Global Economy, pages 161-208 National Bureau of Economic Research, Inc.
    4. Grubert, Harry & Randolph, William C. & Rousslang, Donald J., 1996. "Country and Multinational Company Responses to the Tax Reform Act of 1986," National Tax Journal, National Tax Association;National Tax Journal, vol. 49(3), pages 341-358, September.
    5. 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.
    6. Hines, James R. Jr., 1999. "The Case Against Deferral: A Deferential Reconsideration," National Tax Journal, National Tax Association;National Tax Journal, vol. 52(3), pages 385-404, September.
    7. Hines, James R. Jr., 1999. "Lessons From Behavioral Responses to International Taxation," National Tax Journal, National Tax Association;National Tax Journal, vol. 52(2), pages 305-322, June.
    8. 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.
    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.
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    14. 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.
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    16. repec:bla:joares:v:36:y:1998:i:2:p:321-341 is not listed on IDEAS
    17. Subramanian Rangan & Robert Z. Lawrence, 1993. "The Responses of U.S. Firms to Exchange Rate Fluctuations: Piercing the Corporate Veil," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 24(2), pages 341-379.
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    Citations

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    Cited by:

    1. Desai, Mihir A. & Hines Jr., James R., 2008. "Market reactions to export subsidies," Journal of International Economics, Elsevier, vol. 74(2), pages 459-474, March.
    2. Davies, Ronald B., 2013. "The silver lining of red tape," Journal of Public Economics, Elsevier, vol. 101(C), pages 68-76.
    3. Nuno Limão & Arvind Panagariya, 2003. "Why is there an Anti-trade Bias in Trade Policy?," International Trade 0310003, EconWPA.
    4. Limao, Nuno & Panagariya, Arvind, 2007. "Inequality and endogenous trade policy outcomes," Journal of International Economics, Elsevier, vol. 72(2), pages 292-309, July.
    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.

    More about this item

    JEL classification:

    • H87 - Public Economics - - Miscellaneous Issues - - - International Fiscal Issues; International Public Goods
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies

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