Made in the U.S.A.? A Study of Firm Responses to Domestic Production Incentives

Made in the U.S.A.? A Study of Firm Responses to Domestic Production Incentives

November 22,2018Working Paper No. 3471

How do U.S. companies respond to incentives intended to encourage domestic manufacturing? I study the Domestic Production Activities Deduction (DPAD), which was enacted in the American Jobs Creation Act of 2004 and was the third largest U.S. corporate tax expenditure as of 2017. Using confidential data from the U.S. Bureau of Economic Analysis, I find greater average domestic investment spending of $143.6 million, but only within the sample of domestic-only firms and not until 2010, when the greatest statutory DPAD benefits were available. Furthermore, I observe that these DPAD firms employ approximately 870 fewer domestic workers, as compared to the matched control firms, consistent with a substitution of capital for labor. A potential explanation for the delayed investment response is that firms engage in other responses first, such as changing corporate reporting to shift income across time and borders. Quantifying the extent of these effects contributes to the literature that studies this tax deduction and informs policy makers as to the effectiveness of both manufacturing incentives and reductions in the U.S. corporate income tax rate.