The Business Cycle and the Deduction for Foreign Derived Intangible Income: A Historical Perspective

35 Pages Posted: 9 Aug 2018 Last revised: 31 Oct 2018

See all articles by Tim Dowd

Tim Dowd

Joint Committee on Taxation, U.S. Congress

Paul Landefeld

Joint Committee on Taxation, U.S. Congress

Date Written: July 2, 2018

Abstract

Public Law 115-97, commonly known as the Tax Cuts and Jobs Act, was passed at the end of 2017 and drastically altered the taxation of corporate income with fundamental changes to the treatment of cross-border income flows. We focus on the potential impact of one particular provision, the deduction for Foreign Derived Intangible Income (FDII) which provides a deduction for high return income derived from exports of goods and services. We form a historical panel of corporate tax returns and simulate the deduction for FDII had it been in place from 2000–2015. We find that the deduction would have provided significant benefits, particularly to firms in the manufacturing, information, and professional services sectors. We find these benefits to be highly concentrated. In addition, we find that deemed intangible income (DII) is pro-cyclical in nature — declining significantly as a share of income during recessions. The deduction for FDII exacerbated the pro-cyclical nature of DII during the 2001 recession, whereas during the Great Recession, exports moderated the pro-cyclical nature of DII.

Keywords: international taxation, tax reform, business cycle

JEL Classification: H25, H32

Suggested Citation

Dowd, Timothy and Landefeld, Paul, The Business Cycle and the Deduction for Foreign Derived Intangible Income: A Historical Perspective (July 2, 2018). Available at SSRN: https://ssrn.com/abstract=3217279 or http://dx.doi.org/10.2139/ssrn.3217279

Timothy Dowd (Contact Author)

Joint Committee on Taxation, U.S. Congress ( email )

Room 503 Ford House Office Building
Washington, DC 20515
United States

Paul Landefeld

Joint Committee on Taxation, U.S. Congress ( email )

The Joint Committee on Taxation
H2-502 Ford House Office Building
Washington, DC 20515
United States

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