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The corporate investment response to the domestic production activities deduction

Author

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  • Eric Orhn

    (Grinnelll College)

Abstract

The paper examines how corporate investment responds to the Domestic Production Activities Deduction, a US federal tax regulation that is currently the third largest U.S. corporate tax expenditure. The deduction e ectively lowers the corporate tax rate on manufacturing income by 3.15 percentage points. To study the impact of the deduction, plausibly exogenous variation created by the interaction of industry-level manufacturing activity and the phase-in of the policy is exploited. Results indicate investment by publicly traded firms increased by approximately 7% once the deduction was fully implemented. Further analysis suggests this strong response is, at least in part, driven by the interaction of the deduction and another concurrent incentive, the 2004 tax holiday on repatriated foreign earnings.

Suggested Citation

  • Eric Orhn, 2015. "The corporate investment response to the domestic production activities deduction," Working Papers 1526, Oxford University Centre for Business Taxation.
    • Handle: RePEc:btx:wpaper:1526
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    File URL: http://www.sbs.ox.ac.uk/sites/default/files/Business_Taxation/Docs/Publications/Working_Papers/series-15/WP1526.pdf
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    Cited by:

    1. Fan, Ziying & Liu, Yu, 2020. "Tax Compliance and Investment Incentives: Firm Responses to Accelerated Depreciation in China," Journal of Economic Behavior & Organization, Elsevier, vol. 176(C), pages 1-17.

    More about this item

    Keywords

    Domestic production activities deduction; taxation; investment;
    All these keywords.

    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity

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