Suppose that corporation XYZ has a domestic income of $1,000,000 and paid foreign taxes of $200,000. If the domestic corporate tax rate is 25 percent, how much will XYZ pay in domestic taxes if multinational firms are allowed to deduct foreign tax payments from their domestic taxable income? How much would XYZ pay in domestic taxes if the domestic government provides a tax credit for the foreign taxes paid? How would these alternative methods of treating foreign taxes affect XYZ’s decision between making a domestic versus a foreign investment, when the before-tax incomes are identical across the two countries?