The Uneasy Marriage of Export Incentives and the Income Tax

68 Pages Posted: 18 Nov 2000 Last revised: 25 Jun 2001

See all articles by Mihir A. Desai

Mihir A. Desai

Harvard Business School - Finance Unit; National Bureau of Economic Research (NBER)

James R. Hines Jr.

University of Michigan; NBER

Date Written: November 2000

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

Desai, Mihir A. and Hines, James Rodger, The Uneasy Marriage of Export Incentives and the Income Tax (November 2000). NBER Working Paper No. w8009. Available at SSRN: https://ssrn.com/abstract=250364

Mihir A. Desai (Contact Author)

Harvard Business School - Finance Unit ( email )

Boston, MA 02163
United States
617-495-6693 (Phone)
617-496-6592 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

James Rodger Hines

University of Michigan ( email )

625 South State Street
Ann Arbor, MI 48109-1215
United States

NBER

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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