Corporate Responses to the Repatriation Incentive and Domestic Production Activities Deduction of the American Jobs Creation Act of 2004

Abstract

The 2004 American Jobs Creation Act (AJCA or the Act) was intended to encourage U.S. companies to repatriate foreign earnings and invest them domestically to increase capital spending and employment. We investigate combined effects of two tax provisions, i.e., the repatriation tax holiday and the domestic production activities deduction (DPAD) on domestic investment and payout behaviors. In doing so, we sort repatriating firms based on tightness of capital constraints. We find that the two tax incentives fail to induce non-constrained, repatriating firms benefiting from DPAD to reinvest the capital domestically. Only capital-constrained, repatriating firms benefiting from DPAD increase domestic investment and reduce share repurchases; however, these firms increase cash dividends. Our findings should be useful to policy makers in their considerations to modify the corporate tax structure to increase domestic investment by encouraging U.S. firms to repatriate foreign earnings and reinvest them domestically.