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This chapter evaluates the effectiveness of states' research and development (R&D, used to represent creditable research expenses) tax credits. Prior studies report mixed results on the effect of state R&D tax credit incentives. Generally, such studies consider the influence of state R&D tax credits by applying the statutory income tax and R&D credit tax rates. We reexamine the effect of a state's entire tax burden instead of the statutory tax rates in moderating the effectiveness of a state's R&D tax credit incentives. After controlling for several nontax factors, such as the workplace environment, political environment, and workforce education levels in a regression analysis during the 2010–2013 period in 50 states, we find that statewide private-sector R&D spending is a positive function of the R&D tax credit and this effect increases with the overall level of the state tax burden. We attribute this finding to the fact that high tax burdens increase the present value of the R&D tax credits.

The replacement of the book-income adjustment (BIA) component of the corporate alternative minimum tax (AMT) formula with the adjusted current earnings (ACE) component in 1990 increased the effective tax rate on interest income from municipal bonds and lowered the yield on municipal bonds relative to taxable bonds. This study assesses the effects of the replacement of the BIA with the ACE on municipal bond holdings for a sample of 72 banks over the 1987–1993 period. Results show that banks that were likely to pay the AMT held significantly lower amounts of municipal bonds in the period following the enactment of the ACE adjustment than banks that were likely to pay the regular tax.

In view of the recent enhanced concerns of the SEC and PCAOB that Accounting Principles Board Opinion No. 23 (APB 23)–asserting firms do not comply with the “sufficient evidence” criteria of APB 23, we examine whether APB 23–asserting firms that declared their foreign earnings as permanently reinvested abroad are less likely to repatriate those foreign earnings under the American Jobs Creation Act (AJCA) of 2004, compared with similar non-asserting firms. The asserting firms are required to disclose sufficient evidence that validates an ability to meet their domestic cash needs with only earnings generated in the United States and their plans to indefinitely reinvest foreign earnings outside the United States. Estimates show that asserting firms are more likely to repatriate their foreign earnings than non-asserting firms. In addition, we find that the probability of making an election to repatriate permanently invested foreign earnings under the AJCA of 2004 is higher for firms with nonbinding foreign tax credit (FTC) limitations that have made an APB 23 declaration to permanently invest foreign earnings abroad. These findings suggest that asserting firms’ declarations to indefinitely reinvest foreign earnings abroad are not well grounded, thereby indirectly validating the SEC’s and PCAOB’s increased scrutiny for supporting evidence for APB 23 assertion. The estimates also show that the likelihood of making an election to repatriate foreign earnings under the AJCA of 2004 increases with asserting firms’ liquidity constraints and financial distress: the financial characteristics listed as part of APB 23 criteria of sufficient evidence and highlighted by the SEC and PCAOB comment letters, indicating that asserting firms raid permanently reinvested foreign earnings to satisfy their financial needs and constraints.

The chapter examines whether the lowering of dividend taxes as part of the US Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) resulted in an increase in dividend payouts at the expense of research and development (R&D) spending. Using 1,206 US firm-years data, we find that R&D investments responded negatively to higher levels of dividend payout in the post-JGTRRA of 2003 tax regime compared with the pre-regime. We also find that R&D intensity and financial constraint moderate this negative relation. That is, this relation only holds for firms in low R&D-intensity industries and firms facing high levels of financial constraint. From a tax policy perspective, even though the tax cut on dividend receipts has the benefit of lowering the cost of equity capital, the benefit appears to have come at the expense of R&D investment.

This article examines the sensitivity of U.S. exports to the availability of export incentives offered under the Domestic International Sales Corporation (DISC) and the Foreign Sales Corporation (FSC) provisions of U.S. tax law. Evidence on the efficacy of export tax incentives is mixed. The history of the DISC/FSC tax incentives provides a natural experiment to address the question of the effect of tax incentives on export volume. We examine the relation of U.S. export volume to the availability of these export tax incentives from 1967 to 1998, controlling for product class and important macroeconomic variables, and find evidence of a positive association between the level of U.S. exports and the existence of the export incentives offered under the DISC/FSC provisions. However, this association depends on product type. Our findings using actual export data are independent of otherwise available data demonstrating a general growth in the use of DISC/FSC entities and the sales volume of these entities. The latter data suffer from an interpretation problem because changes in the number of special export entities used and their sales volume do not necessarily correlate with changes in actual export levels over time. The approach we use in this study is an attempt to overcome this limitation. The reported results have implications for both tax policy regarding the design of export tax incentives and the European Union’s claim that U.S. export tax incentives have damaged U.S. competitors in foreign trade.