Made in the USA? : a study of firm responses to domestic production incentives

Abstract

How do U.S. companies respond to incentives intended to encourage domestic production and manufacturing? I study this question in the context of the Domestic Production Activities Deduction (DPAD), which was enacted in the American Jobs Creation Act of 2004 and is currently the third largest U.S. corporate tax expenditure. Specifically, I examine 1) whether and to what extent firms shift income to maximize the domestic manufacturing benefit, and 2) the extent that firms actually increase domestic investment and employment, measured using confidential data from the U.S. Bureau of Economic Analysis. While I find a positive effect of DPAD on domestic investment, I also find that DPAD firms shift income across time and (to a lesser extent) across borders to maximize the tax benefit. These results show that changes in firm reporting are an important and economically significant response that has not been studied previously in this context. Additionally, these findings inform the ongoing policy debate on the possible extension or repeal of this tax incentive.