The corporate investment response to the domestic production activities deduction

Eric Orhn ()
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Eric Orhn: Grinnelll College

No 1526, Working Papers from Oxford University Centre for Business Taxation

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.

Keywords: Domestic production activities deduction; taxation; investment (search for similar items in EconPapers)
JEL-codes: E22 H25 H32 (search for similar items in EconPapers)
Date: 2015
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