In 1987, U.S. controlled companies earned an average 2.09% return on assets, nearly four times their foreign controlled counterparts. A number of American politicians have used these figures to argue that there is widespread tax cheating by foreign-owned multinationals.
a. What are some economically plausible reasons (other than tax evasion) that would explain the low rates of return earned by foreign-owned companies in the United States? Consider the consequences of the debt financed U.S.-investment binge that foreign companies went on during the 1980s and the dramatic depreciation of the U.S. dollar beginning in 1985.
b. What are some of the mechanisms that foreign-owned companies can use to reduce their tax burden in the United States?
c. The corporate tax rate in Japan is 60%, whereas it is 35% in the United States. Are these figures consistent with the argument that big Japanese companies are overcharging their U.S. subsidiaries in order to avoid taxes? Explain.