TABLE 1


Example
Host Country Taxation
Taxable profit 100 100
Host Country Tax –85 –85
After Host Country Tax 15 15


















TABLE 2


U.S. OWNED OIL COMPANIES FOREIGN COMPETITORS
US Present Law US Proposed Foreign Competitor's Home Country Tax
Home Country Taxation
Taxable Profit 100 100 Not applicable because foreign income is exempt from taxation if subject to tax in host country.
Foreign Tax deduction None –85
Taxable Income 100 15
Tentative Tax (e.g., U.S. tax at 35%) 35 5.25
FTC limited to US tax on foreign source income –35 N/A
Home Country Tax payable 0 5.25
Profit after Tax payments
Profit before taxes 100 100 100
Tax to Host Country –85 –85 –85
Tax to Home Country 0 –5.25 0
After Tax Profit 15 9.75 15


















TABLE 3


Projected Export and Revenue Impact of the Export Source Rule, 1998-2002 (Central projections based on Kemsley data and parameters)
1998 1999 2000 2001 2002
Benefits to U.S. Economy
Additional U.S. exports ($ millions) 28,223 30,763 33,532 36,550 39,839
Jobs supported by additional exports 343,774 360,088 377,177 395,076 413,825
Additional wages and salaries ($ millions) 1,572 1,708 1,857 2,018 2,194
Costs to U.S. Treasury ($ millions)
Tax revenue forecasts 891 1,474 1,555 1,750 1,855
Revenue offsets (arising from wage and salary premiums) n.a. 367 399 434 472
Adjusted tax revenue forecasts n.a. 1,107 1,156 1,316 1,383

Sources and Notes: See Tables 1 and 4 of the report.

















TABLE 4


Table 1. Calculated Impact of the Export Source Rule in 1992: Direct Estimates Based on Kemsley Parameters
Companies with binding FTC positions Companies with nonbinding FTC positions All sample companies
Sample mean values per company1
Total assets ($ millions) 3,805 2,889 3,254
Foreign sales ($ millions) 1,332 864 1,100
Foreign tax rate (%) 48.63 35.72 42.25
U.S. tax rate (%) 35.00 35.00 35.00
U.S. tax rate with ESR or FSC (%)2 17.50 29.75 n.a.
Addenda: No. of companies per Kemsley 140 136 276
Adjusted no. of companies 247 n.a. n.a.
Additonal U.S. exports ($ millions)3
Per company 68 0 n.a.
All companies 16,792 0 16,792
Jobs supported by additional exports4
All companies 259,725 0 259,725
Wage and salary premium ($ millions)5
All companies 951 0 951

Sources: Authors' calculations based on D. Kemsley, “The Effect of Taxes on Production Location,” Columbia University, January 1997, mimeo; U.S. Department of Commerce, “U.S. Jobs Supported by Exports of Goods and Services,” November 1996; J.D. Richardson and K. Rindal, Why Exports Matter: More! (Washington, D.C.: Institute for International Economics and The Manufacturing Institute, 1996); and Bureau of the Census, Economics and Statistics Administration, U.S. Department of Commerce, Statistical Abstract of the United States 1996, October 1996.
Notes: Companies with “binding FTC positions” are companies in an excess foreign tax credit (FTC) position; companies with “nonbinding FTC positions” are other companies. The estimates are based on the assumption that companies with binding FTC positions take advantage of the Export Source Rule (IRC Section 863(b)); while companies with nonbinding FTC positions utilize the Foreign Sales Corporation (FSC) provisions.
1The full pooled cross-sectional sample of data, compiled by Kemsley (1996) from the financial statements of U.S. multinational companies, consists of 2,486 manufacturing company-years for the period 1984-92. For the calculations presented in the table, the sample mean values are conservatively interpreted as 1992 values.
2It is assumed that companies with binding FTC positions (i.e., with excess foreign tax credits) exclude half their export profits from U.S. taxation by using the Export Source Rule. This reduces the effective U.S. tax rate on such profits from the normal rate of 35 percent to 17.5 percent. It is assumed that companies in nonbinding FTC positions (i.e., without excess foreign tax credits) exclude up to 15 percent of their export profits from U.S. taxation by using the Foreign Sales Corporation (FSC) provisions, thereby reducing the effective U.S. tax rate on such profits from the normal rate of 35 percent to 29.75 percent.
3Estimates are based on econometric findings investigating the magnitude of exports per company associated with U.S. export tax incentives reported by Kemsley (1997), adjusted for the larger number of companies that use the Export Source Rule after the Tax Reform Act of 1986, and also adjusted for the larger impact per company, taking into account exports to foreign affiliates (see text).
4These calculations assume that manufacturing exports support employment at the rate of 15,500 jobs per $1 billion of goods exported in 1992.
5Calculated as an earnings premium of 12 percent of average manufacturing earnings ($30,500 per worker) in 1992, or $3,660 per worker.

















TABLE 5


Table 2. Calculated Impact of the Export Source Rule in 1992: Production Response Approach Based on Grubert and Mutti Parameters
Companies with binding FTC positions Companies with nonbinding FTC positions All sample companies
Sample mean values per company1
Total exports ($ millions) 2,585 2,585 2,585
Foreign tax rate (%) 48.63 35.72 42.25
U.S. tax rate (%) 35.00 35.00 35.00
U.S. tax rate with ESR or FSC (%)2 17.50 29.75 n.a.
Addendum: number of companies 25 25 50
Additonal U.S. exports ($ millions)3
Per company 1,247 0 n.a.
All companies 31,164 0 31,164
Jobs supported by additional exports4
All companies 482,012 0 482,012
Wage and salary premium ($ millions)5
All companies 1,766 0 1,766

Sources: Authors' calculations based on D. Kemsley, “The Effect of Taxes on Production Location,” Columbia University, January 1997, mimeo; H. Grubert and J. Mutti, “Do Taxes Influence Where U.S. Corporations Invest?,” Paper prepared for the Conference on Trans-Atlantic Public Economics Seminar, Amsterdam, Netherlands, May 29-31, 1996 (revised August 1996), mimeo; U.S. Department of Commerce, “U.S. Jobs Supported by Exports of Goods and Services,” November 1996; J.D. Richardson and K. Rindal, Why Exports Matter: More! (Washington, D.C.: Institute for International Economics and The Manufacturing Institute, 1996); Bureau of the Census, Economics and Statistics Administration, U.S. Department of Commerce, Statistical Abstract of the United States 1996, October 1996; and Fortune, “The Top 50 U.S. Exporters,” November 13, 1995.
Notes: Companies with “binding FTC positions” are companies in an excess foreign tax credit (FTC) position; companies with “nonbinding FTC positions” are other companies.
1The figure for total exports per company is based on the experience of the Fortune Top 50 U.S. Exporters, 1994 data adjusted back to 1992 using the average annual growth rate of U.S. manufactures exports. The 25-25 division of Fortune Top 50 Exporters between those with binding FTC positions and those with nonbinding FTC positions is based on Kemsley's full sample which classified 1,258 company-years as binding and 1,228 company-years as nonbinding.
2It is assumed that companies with binding FTC positions (i.e., with excess foreign tax credits) exclude half their export profits from U.S. taxation by using the Export Source Rule to characterize those profits as foreign source income (thereby absorbing part of their excess foreign tax credits). This reduces the effective U.S. tax rate on such profits from the normal rate of 35 percent to 17.5 percent. It is assumed that companies in nonbinding FTC positions (i.e., without excess foreign tax credits) exclude up to 15 percent of their export profits from U.S. taxation by using the Foreign Sales Corporation (FSC) provisions of the Internal Revenue Code, thereby reducing the effective U.S. tax rate on such profits from the normal rate of 35 percent to 29.75 percent.
3Grubert and Mutti (1996) estimate an elasticity of 3.0 for total capital invested by U.S. companies in foreign countries with respect to foreign tax rates. We assume that the ratio between capital invested and export sales is constant. Hence, the Grubert-Mutti elasticity of 3.0 is multiplied by the incremental inducement provided by the Export Source Rule, and then applied to total exports of companies with binding FTC positions. The key assumption in this calculation is that U.S. export production facilities can be regarded as if they were an additional overseas location for production of tradable goods by U.S. multinational firms. Further, it is assumed that, without the Export Source Rule, companies would ship their exports through a Foreign Sales Corporation. Hence, the calculation of additional exports only reflects the incremental inducement provided by the Export Source Rule, beyond the inducement provided by the Foreign Sales Corporation—i.e., an incremental reduction of 12.25 percentage points in the effective tax rate.
4These calculations assume that manufacturing exports support employment at the rate of 15,500 jobs per $1 billion of goods exported in 1992.
5Calculated as an earnings premium of 12 percent of average manufacturing earnings ($30,500 per worker) in 1992, or $3,660 per worker.

















TABLE 6


Table 3. Calculated Impact of the Export Source Rule in 1992: Textbook Approach Based on Export Elasticity Parameters
Companies with binding FTC positions Companies with nonbinding FTC positions All sample companies
Sample mean values per company1
Total exports ($ millions) 2,585 2,585 2,585
Foreign tax rate (%) 48.63 35.72 42.25
U.S. tax rate (%) 35.00 35.00 35.00
U.S. tax rate with ESR or FSC (%)2 17.50 29.75 n.a.
Addendum: number of companies 25 25 50
Additonal U.S. exports ($ millions)3
Per company 228 0 n.a.
All companies 5,700 0 5,700
Jobs supported by additional exports4
All companies 88,163 0 88,163
Wage and salary premium ($ millions)5
All companies 323 0 323

Sources: Authors' calculations based on D. Kemsley, “The Effect of Taxes on Production Location,” Columbia University, January 1997, mimeo; U.S. Department of the Treasury, The Operation and Effect of the Domestic International Sales Corporation Legislation: 1981 Annual Report (Washington, D.C., July 1983); U.S. Department of Commerce, “U.S. Jobs Supported by Exports of Goods and Services,” November 1996; J.D. Richardson and K. Rindal, Why Exports Matter: More! (Washington, D.C.: Institute for International Economics and The Manufacturing Institute, 1996); Bureau of the Census, Economics and Statistics Administration, U.S. Department of Commerce, Statistical Abstract of the United States 1996, October 1996; and Fortune, “The Top 50 U.S. Exporters,” November 13, 1995.
Notes: Companies with “binding FTC positions” are companies in an excess foreign tax credit (FTC) position; companies with “nonbinding FTC positions” are other companies.
1The figure for total exports per company is based on the experience of the Fortune Top 50 U.S. Exporters, 1994 data adjusted back to 1992 using the average annual growth rate of U.S. manufactures exports. Tax rates are from Kemsley. The 25-25 division of Fortune Top 50 Exporters between those with binding FTC positions and those with nonbinding FTC positions is based on Kemsley's full sample which classified 1,258 company-years as binding and 1,228 company-years as nonbinding.
2It is assumed that companies with binding FTC positions (i.e., with excess foreign tax credits) exclude half their export profits from U.S. taxation by using the Export Source Rule to characterize those profits as foreign source income (thereby absorbing part of their excess foreign tax credits). This reduces the effective U.S. tax rate on such profits from the normal rate of 35 percent to 17.5 percent. It is assumed that companies in nonbinding FTC positions (i.e., without excess foreign tax credits) exclude up to 15 percent of their export profits from U.S. taxation by using the Foreign Sales Corporation (FSC) provisions of the Internal Revenue Code, thereby reducing the effective U.S. tax rate on such profits from the normal rate of 35 percent to 29.75 percent.
3Estimates are derived by applying the textbook export elasticities approach to measuring the trade effects of export tax incentives, as outlined in U.S. Treasury Department (1983). The profit-to-export-sales ratio for all companies is assumed equal to 0.12. High values of the price elasticities of demand and supply for U.S. exports of manufactures, –10 and 20 respectively, are assumed in order to calculate the largest possible impacts of the Export Source Rule under the elasticities approach. These price elasticity estimates imply a “multiplier” value of 6.0, relating the proportional change in export sales to the tax-induced change in export income (expressed as a percentage of export sales) attributable to the Export Source Rule. The Export Source Rule saves firms 12.25 percentage points of taxation; assuming a profit-to-export sales ratio of 0.12, this translates into additional export income equal to 1.47 percent of export sales. Applying the “multiplier” of 6.0 indicates export gains of 8.82 percent.
4These calculations assume that manufacturing exports support employment at the rate of 15,500 jobs per $1 billion of goods exported.
5Calculated as an earnings premium of 12 percent of average manufacturing earnings ($30,500 per worker) in 1992, or $3,660 per worker.

















TABLE 7


Table 4. Projected Export and Revenue Impact of the Export Source Rule, 1996-2000
1998 1999 2000 2001 2002
Additional U.S. exports ($ millions)
Based on Kemsley parameters 28,223 30,763 33,532 36,550 39,839
Based on Grubert-Mutti parameters 52,379 57,093 62,231 67,832 73,937
Based on export elasticities approach 9,580 10,443 11,382 12,407 13,523
Employment and earnings
Jobs supported by additional exports
Based on Kemsley estimates 343,774 360,088 377,177 395,076 413,825
Based on Grubert-Mutti estimates 637,995 668,272 699,986 733,204 768,000
Based on export elasticities approach 116,693 122,231 128,032 134,108 140,472
Addenda: jobs per $1 bill. of exports1 12,181 11,705 11,248 10,809 10,387
Additional wages and salaries ($ m)2
Based on Kemsley estimates 1,572 1,708 1,857 2,018 2,194
Based on Grubert-Mutti estimates 2,917 3,171 3,446 3,746 4,071
Based on export elasticities approach 534 580 630 685 745
Addenda: average earnings per worker in manufacturing ($)1 38,104 39,538 41,026 42,570 44,171
Tax revenue forecasts ($ millions)3
U.S. Treasury 891 1,474 1,555 1,750 1,855
Revenue offset ($ millions)4
Based on Kemsley parameters n.a. 367 399 434 472
Based on Grubert-Mutti parameters n.a. 682 741 805 875
Based on export elasticity parameters n.a. 125 136 147 160
Adjusted tax revenue forecasts ($ m)5
Based on Kemsley parameters n.a. 1,107 1,156 1,316 1,383
Based on Grubert-Mutti parameters n.a. 792 814 945 980
Based on export elasticity parameters n.a. 1,349 1,419 1,603 1,695

Sources: Tables 1, 2, and 3; International Trade Administration, U.S. Department of Commerce, U.S. Foreign Trade Highlights, October 28, 1996; J.D. Richardson and K. Rindal, Why Exports Matter: More! (Washington, D.C.: Institute for International Economics and The Manufacturing Institute, 1996); U.S. Department of Commerce, “U.S. Jobs Supported by Exports of Goods and Services,” November 1996; Bureau of the Census, Economics and Statistics Administration, U.S. Department of Commerce, Statistical Abstract of the United States 1996, October 1996; and Office of Management and Budget, Budget of the United States Government, Fiscal Year 1998, February 6, 1997.
Notes: Projections of additional U.S. exports and employment are based on the estimates for 1992 presented in Tables 1, 2, and 3. Additional exports are projected using the recorded average annual growth rate of U.S. exports of manufactures during 1992-96 (9 percent). The calculations in this version of Table 4 differ from earlier versions for two reasons. First, the export wage premium is calculated at 12 percent of average earnings per worker in manufacturing, to reflect a blend of wage premiums both in firms that directly export and in firms that indirectly export by furnishing goods and services to exporting firms. An earlier version of Table 4 used a 15 percent wage premium, which only applies to firms that directly export. The second change is that the relevant marginal tax rate applied to export wage premiums is calculated at 21.5 percent. This assumes that half the export workers pay the minimum marginal Federal tax rate of 15 percent, and half the workers pay a marginal Federal tax rate of 28 percent (which applies to married couples with taxable income above $36,000). These revisions in Table 4 were already reflected in previous versions of Tables 1, 2 and 3.
1The addenda items reflect an annual growth rate of labor productivity in U.S. manufacturing sectors of 4 percent, based on the record of labor productivity in U.S. industry during 1985-93.
2Additional U.S. wages and salaries in 1992 are estimated using the jobs estimates multiplied by the average annual earnings of workers in manufacturing industries in that year ($30,500) and by the higher increment to wages and salaries (12 percent) enjoyed by workers in export manufacturing plants, the latter figure as reported by the U.S. Department of Commerce (1996). The projections for the years 1998 to 2002 are derived in the same manner as those for additional exports and employment.
3Tax revenue forecasts are supposed to reflect obvious changes in business behavior that are induced by a change in the tax law. If the Export Source Rule is repealed, U.S. multinational companies would exclude up to 15 percent of their export profits from U.S. taxation by utilizing the FSC provisions of the Internal Revenue Code. This change is reflected in the Treasury revenue forecasts (Office of Management and Budget 1997).
4The tax revenue offsets are the additional tax revenues related to the higher earnings enjoyed by the workers who produce the exports supported by the Export Source Rule. The tax revenue offsets are estimated by applying the average marginal U.S. income tax rate for individuals in 1996 (calculated at 21.5 percent) to the estimates in the table of additional U.S. earnings supported by the shift in output towards export industries as a consequence of the Export Source Rule.
5Under each of the three approaches to estimation of the impact of the Export Source Rule, the adjusted revenue forecasts are equal to the tax revenue forecasts minus the calculated tax revenue offsets.

















TABLE 8


Table 5. Estimates of Long-Run Price Elasticities of Demand and Supply for U.S. Exports
Investigator Demand Supply
Manufacturing exports
Stern and Francis (1976) –1.24 n.a.
Junz and Rhomberg (1973) –3.88 n.a.
Artus and Sosa (1978) –0.77 3.10
Lawrence (1978) –1.85 n.a.
Dunlevy (1978) n.a. 2.10
U.S. Treasury (1983) –10.00 20.00
Total exports
Houthakker and Magee (1969) –1.51 n.a.
Magee (1970) n.a. 11.50
Stern and Francis (1976) –1.41 n.a.
Goldstein and Khan (1978) –2.32 6.60
Gylfason (1978) n.a. 2.40
Geraci and Prewo (1980) n.a. 12.20

Sources: R.M. Stern and J. Francis, Price Elasticities in International Trade: An Annotated Bibliography (London: Macmillan for the Trade Policy Research Centre, 1976); U.S. Department of the Treasury, The Operation and Effect of the Domestic International Sales Corporation Legislation: 1981 Annual Report (Washington, D.C.: July 1983); and M. Goldstein and M. Khan, “Income and Price Effects in Foreign Trade,” in Handbook of International Economics, Vol. II, eds., R.W. Jones and P.B. Kenen (Amsterdam: North-Holland, 1985).
Notes: The price elasticities of demand for U.S. exports reported by Stern and Francis (1976) are “mean” estimates compiled by the two authors from econometric studies by other investigators. The elasticities in U.S. Treasury (1983) are assumed values that are intended to represent “high” estimates of price elasticities of demand and supply for U.S. exports of manufactures.

















TABLE 9


Table 6. U.S. Merchandise and Manufactures Trade, 1985-2000 (Billions of U.S. dollars, Census basis)
year Total Goods1 Manufactured Goods2
Exports Imports Balance Exports Imports Balance
1985 218.8 336.5 –117.7 168.0 257.5 –89.5
1986 227.2 365.4 –138.3 179.8 296.7 –116.8
1987 254.1 406.2 –152.1 199.9 324.4 –124.6
1988 322.4 441.0 –118.5 255.6 361.4 –105.7
1989 363.8 473.2 –109.4 287.0 379.4 –92.4
1990 393.6 495.3 –101.7 315.4 388.8 –73.5
1991 421.7 488.5 –66.7 345.1 392.4 –47.3
1992 448.2 532.7 –84.5 368.5 434.3 –65.9
1993 465.1 580.7 –115.6 388.7 479.9 –91.2
1994 512.6 663.3 –150.6 431.1 557.3 –126.3
1995 584.7 743.4 –158.7 486.7 629.7 –143.0
1996 616.6 783.0 –166.4 521.3 653.9 –132.6
1997 672.1 568.2
1998 732.6 619.4
1999 798.5 675.1
2000 870.4 735.9

Sources: International Trade Administration, U.S. Department of Commerce, U.S. Foreign Trade Highlights, October 28, 1996; and Bureau of Economic Analysis, U.S. Department of Commerce, Commerce News: U.S. International Trade in Goods and Services, September 1996, November 20, 1996.
Notes: All values for 1996 are extrapolated from reported values for the first nine months. Values of exports during 1997-2002 are projected, assuming an annual average growth rate of 9 percent.
1Includes nonmonetary gold, military grant aid, special category shipments, trade between the U.S. Virgin Islands and foreign countries, and undocumented exports to Canada. Adjustments were also carryover. Import values are based on transaction prices whenever possible
2Manufactured goods include commodity sections 5-9 under SITC Rev. 3. Manufactures include undocumented exports to Canada, nonmonetary gold (excluding gold ore, scrap, and base bullion), and special category shipments.