Office of Tax Analysis 

U.S. Treasury Department

Washington, D.C. 20220 

Issued: January 1977 

The Effect on U.S. Foreign Direct 

Investment of the Integration of the 

Corporate and Personal Income Taxes 

James A. Griffin 

U.S. Treasury Department 

OTA Paper 22 March 1974 
I. 

II. 

III. 

IV. 

V. 

VI. 

TABLE OF CONTENTS 

Page 

Introduction ................. 1 

The Current System .............. 2 

An Integrated System ............. 5 

Effect on U.S. Foreign Direct

Investment ................ 13 

International Tax Neutrality ......... 17 

Quantitative Effects of an

Integrated System ............. 23 

A. Potential Gains in National Income ... 24 

B. Potential Gains in Tax Revenue ..... 43 

Appendix ................... 47 
-1-

I. INTRODUCTION 

Two major proposals for reform of the U.S. corporate 

income tax are the integration of the corporate and personal 

income tax and the elimination of the credit for foreign 

taxes paid on U.S. corporate income. While the cases for and 

against each of these proposals are well known to those 

concerned with tax policy, there is no evidence of any 

analysis having been made of the interconnection between the 

two proposals. 

Integration of the U.S. corporate and personal income 

tax could, under certain formulations, have a significant 

effect on the incentives of U.S. corporations to invest 

abroad. A decline in U.S. foreign direct investment could 

result in substantial gains to national income and tax 

revenue, offsetting in part the revenue losses which are 

generally anticipated from integration. 

This is not to say that integration should be undertaken 

because of international considerations or that its effect on 

U.S. foreign investment would be preferable to that from the 

elimination of the foreign tax credit. The thesis of this 

paper is that the case for integration (whatever it may be) 

is substantially strengthened when the effects on foreign 

investment are taken into account. 
-2-

II. THE CURRENT SYSTEM 

The basic criticism of U.S. tax law on foreign source 

income is that it stimulates corporations to make investments 

abroad which would earn a higher social rate of return if 

invested domestically. This arises because firms are allowed 

to take a credit against U.S. tax liability for foreign 

income taxes paid. Thus, the private firm is indifferent as 

to whether it pays taxes to a foreign country or to the 

U.S. From the national interest standpoint, however, taxes 

paid to foreign treasuries by U.S. corporations represent a 

loss to national income, while taxes paid to the U.S. 

Treasury have no effect on national income. Where the 

foreign tax rate is less than the U.S. tax rate, the firm has 

a positive incentive to invest abroad because it can defer 

the higher U.S. taxes indefinitely by reinvesting abroad the 

earnings of foreign subsidiaries. 

In assessing U.S. foreign investment from the standpoint 

of the national interest, the appropriate comparison is 

between the domestic rate of return before taxes and the 

foreign rate of return after foreign taxes. The difference 

between these two rates is referred to as the "net social 

rate of return". 
-3-

Studies done on the net social rate of return on U.S. 

foreign direct investment indicate that it is on the whole 

-1/

negative. While it is a moot question whether foreign 

investment is a substitute for or a supplement to domestic 

investment, the current tax treatment of foreign source 

income undoubtedly works in the direction of stimulating the 

export of capital which could earn a higher net social return 

if invested in the U.S. 

In order to eliminate this conflict between private 

interests and the national interest it has frequently been 

proposed that the foreign tax credit should be eliminated, 

along with tax deferral, and that foreign taxes should be 

taken as a deduction and foreign source income taxed on a 

current basis, that is, as earned by the foreign affliate 

whether or not it is repatriated to the U.S. parent. The 

United States Taxation of Foreign Investment Income, 

Peggy B. Musgrave, the Law School of Harvard University,

Cambridge, 1969, pp. 27-30. "The Private and Social Rate 

of Return from U.S. Asset Holdings Abroad", Herbert G. 

Grubel, unpublished study done for Treasury Department,

December, 1971. 
-4-

objections to these proposals cover the lot of economic, 

political, and national security considerations and the 

debate usually bogs down in the question of whether U.S. 

foreign investment is or is not advantageous on the whole to 

U.S. national interests. 

In any event, as a practical political matter it is 

doubtful that the foreign tax credit and tax deferral will be 

eliminated or curtailed to the extent necessary to have a 

significant effect on the social return of foreign 

investment. The foreign tax credit and tax deferral are the 

established practice of all major countries and their 

elimination by the U.S. would be in the face of the strongest 

resistance and protest by other countries. It would 

necessitate the termination of all U.S. international tax 

treaties. Internally, opponents would claim that the change 

would impose a discriminatory penalty on multinational 

corporations, with the direst of consequences for the 

competitive position of the U.S. in world trade. 
-5-

III. AN INTEGRATED SYSTEM 

The integration of the U.S. corporate and personal 

income taxes, in addition to its benefits in general to 

equity and economic efficiency, could serve the same 

purpose as the elimination of the foreign tax credit and 

tax deferral, although with less force. Most of the other 

industrial countries now have some form of integrated system, 

the most recent country to move in this direction being the 

United Kingdom in 1973. An integrated system for the U.S. 

has been frequently discussed, both within and without the 

Treasury, but the international implications of such a 

system have received virtually no attention. 

Integration in its purest form eliminates the 

corporate income tax altogether and taxes the earnings 

of the corporation directly to stockholders at their personal rates of tax whether or not the earnings are 

distributed. This approach, called the partnership method, 

presents certain practical difficulties, however, and 

there are serious doubts about its administrative feasibility. No major country has integrated its tax system 

to this extent and it is probably not a realistic possibility 

for the U.S. in the foreseeable future. 
-6-

The integration methods now in use by other major 

-

2

countries all involve some variation of the credit method. 

This method taxes undistributed profits at a flat rate, as 

under the present U.S. system, but eliminates (or reduces) 

the double taxation of distributed profits by allowing a 

tax credit equivalent to some portion of distributed profits. 

Under the dividends-paid-credit system (DPC) the tax credit 

is taken at the corporate level and applied against the 

corporation's tax liability, while under the dividendsreceived-credit system (DRC) the credit is taken at the 

shareholder level and applied against personal income tax 

liability. 

The DPC and DRC systems can both be structured to 

give the same result ineliminating or reducing the 

double taxation of distributed profits. From the 

international standpoint, however, an important difference 

is that when the tax relief is given at the corporate 

level, corporate profits flowing to nonresident shareholders 

escape taxation by the host country altogether (except for 

withholding taxes), whereas under the DRC system such income 

would continue to be taxed by the U.S. at the full corporate 

-2/ See Company Tax Systems in OECD Member Countries, OECD,

Paris, 1973, for descriptions of various systems in 

effect. 
-7-

rate. While both systems would have the same effect on 

U.S. foreign investment, the advantage of the DRC system 

regarding foreign investment in the U.S. recommends its -31 

usage. 

Assume then that a dividends-received-credit system 

is adopted by the U.S. and that shareholders are allowed 

a credit for the full amount of corporate tax "deemed paid" 

on their dividends. In the case of distributed earnings 

the corporate tax would, in effect, be eliminated, since 

tax payments by the corporation would be tantamount to 

withholding at source on dividends. Dividends would be 

grossed up to reflect the withheld tax, the gross-up being 

included in the recipient's income and claimed as a credit 

against his tax liability. Illustration A shows the effect 

of adopting the DRC system of taxation on two shareholders 

in different tax brackets, assuming the corporate tax was 

continued at a rate of 48 percent and refunds were given to 

individuals whose tax liability fell short of the credit, 

-3/ This consideration was the primary reason why the 

Canadian Royal Commission and the U.K. Select Committee 

recommended against systems which would give relief at 

the corporate level. Germany, which adopted a splitrate system giving relief at the corporate level, has 

become increasingly conscious of the "giveaway" to 

foreigners entailed by this approach. 
-aIllustration A 

Corporate earnings 

Corporate tax 

Dividends paid 

Taxable income 

Tax liability 

Minus tax credit 

Current System 

100 

4a 

52 

52 

(@30%) (@70%)

15.6 36.4 

- -

DRC System 

100 

48 

52 

100 

((330%) ((370%) 

30 70 

4a 4a 

-18 22 

30 70 

Tax due or rebate (-) 15.6 36.4 

Total tax burden 63.6 84.4 

The total tax collected on each stockholder's share 

of gross corporate profits would be equivalent to his 

personal tax rate in the case of distributed profits. 

The switch franthe present system would benefit all 

shareholders and the benefit would be greater the 

lower the shareholder's personal rate of taxation. 

There would be no change from the present system in 

regard to the total tax collected on undistributed profits, 

but the incentive which now exists for shareholders to retain earnings rather than pay them out as dividends would 

be substantially changed. Under the current system, -all

shareholders (excepting those with no tax liability) gain 
-9-

a tax advantage from taking the return on their investment 

in the form of appreciation in share values rather than 

dividend income. In addition to the more favorable capital 

gains tax, the deferral of any personal tax liability so 

long as corporate profits are not distributed is a further 

advantage. Under the DRC system, only those shareholders 

whose marginal tax rate was greater than the corporate tax 

rate would find it advantageous for their share of corporate 

earnings to be retained by the corporation. Illustration B 

shows how the incentives toward retained profits would be 

changed by the DRC system before taking account of the 

tax on capital gains realized by the sale of shares. 

Shareholders whose personal marginal tax rate was 

exactly equal to the corporate tax rate, 48 percent, would be 

indifferent between retained and distributed profits if no 

account is taken of the capital gains tax and no weight is 

attributed to the liquidity advantage of income in the form 

of dividends. When these factors are taken into account, 

the point of indifference would be somewhat greater than 

a personal tax rate of 48 percent. 
- 10 -

Illustration B* 

Current DRC 

System System 

Personal tax rate -30% -70% ‘30% __ 70%

Net return on $100 of 

corporate earnings if: 

(a) Profits distributed 36.4 15.6 70.0 30.0 

(b) Profits retained 52.0 52.0 52.0 52.0 

Incentive or disincentive(-) 

to distribute -15.6 -36.4 18.0 -22.0 

* Assumes that retained profits are fully reflected in 

increased market values of shares. To the extent that 

this is not the case and/or to the extent that shareholders have a preference for realizing their returns 

in the form of dividends rather than stock appreciation,

the incentives (disincentives) to distribute are greater

(less). However, these considerations would not affect 

the comparisons of the two sytems. 

The average marginal tax rate applicable to dividend 

receipts is currently estimated at about 35 percent. Table 1 

shows the distribution of dividend receipts in 1971 by 

Adjusted Gross Income (AGI) class. While these data are not 

necessarily representative of the distribution of stock ownership, it is apparent that stockholders whose personal tax rate -4/ 

is less than 48 percent constitute a majority. Although 

most stockholders in large corporations have little or no 

-

4/ The 48 percent tax bracket starts at a taxable income of

$40,000 for married taxpayers and about $30,000 for single 

taxpayers. 
- 11 -

direct influence on dividend policies, their preference 

for shares with high payout ratios would be reflected in 

the demand for and price of shares, to which corporate 

officials, the board of directors, and high tax bracket 

shareholders could not be indifferent. Thus, the shift in 

incentives induced by the adoption of the DRC system toward 

a preference for dividends on the part of the majority of 

stockholders should lead to a substantial increase in the 

payout ratios of large corporations. 
- 12 -

Table 1 

Percentage of Total Dividends Reported to 

the Internal Revenue Service in 1971 by Adjusted

Gross Income (AGI) 

Persons reporting an 

AGI of less than: 

$20,000 

$25,000 

$30,000 

$50,000 

$100,000 

$200,000 

$500,000 

$1,000,000 

Accounted for this 

proportion of total 

dividends reported: 

34% 

41% 

47% 

60% 

76% 

87% 

94% 

97% 

Source: Statistics of Income, Individual Income Tax 

Returns, 1971, I.R.S., Wash., D.C., 1973. 
- 13 -

IV. EFFECT ON U.S. FOREIGN DIRECT INVESTMENT 

In the case of foreign investment decisions by U.S. 

corporations, one influencing factor would be the way in 

which the foreign tax credit was handled. The foreign 

tax credit as well as tax deferral could be continued. Thus, 

there would be no change from the present system in regard 

to foreign earnings retained abroad and remittances from 

foreign affiliates which were retained by the parent corporation, In the case of foreign source earnings distributed 

to stockholders, however, stockholders would be allowed to 

take a credit against their personal tax liability only for 

U.S. corporate taxes paid. In other words, the foreign tax 

-5/ credit would not pass through to stockholders. 

This would mean that the private incentive for foreign 

investment from the standpoint of stockholders would be the 

same as the net social rate of return. Illustration C shows 

what the comparative incentives would be for two stockholders 

in different tax brackets in the case of a given amount of 

investment in three different corporations. For simplicity 

it is assumed that the earnings of the "Domestic Corporation" 

-5/ This would be similar to the approach adopted by the 

British under their newly integrated system which limits 

the amount of the foreign tax credit which can pass

through to stockholders. 
- 14 -

Illustration C 

Incentive for Investment under the DRC System,

Allowing Credit Against Personal Tax Liability

Only for U.S. Taxes Paid 

Gross profit 

Foreign Tax @40% 

Remitted to parent 

U.S. corp. tax liab. 

Foreign tax credit 

U.S. corp. tax paid 

Dividend 

Stockholders. tax. inc. 

Personal tax liab: 

30% taxpayer

70% taxpayer 

Credit for U.S. corp. 

tax deemed paid 

Personal tax paid:

30% taxpayer

70% taxpayer 

Net return: 

30% taxpayer

70% taxpayer 

Direct Direct 

Domestic Investment Investment 

Corp. Corp. A Corp. B 

$100 $100 $167 

40 67 

- 60 100 

48 48 80 

- 40 67 

48 8 13 

52 52 87 

100 60 100 

30 

70 

18 

42 

30 

70 

48 8 13 

-18 

22 

10 

34 

17 

57 

70 

30 

42 

18 

70 

30 
- 15 -

are entirely from U.S. sources and those of the "Directinvestment Corporations'' are entirely from foreign sources. 

The social return is "Gross profit" in the case of 

the domestic corporation and "Remitted to Parent" (or 

available for remission in cases where earnings are 

reinvested in the foreign affiliate) in the cases of the 

direct investment corporations. The illustration shows that 

all stockholders would have a disincentive to invest in 

Direct-investment Corporation A, where the net social return 

is negative (by $40) and would be indifferent between 

Direct-investment Corporation B, where the net social return 

is zero, and the domestic corporation. 

Under the proposed DRC system with credit allowed to 

the stockholder only for U.S. corporate taxes paid, the 

private incentive to invest in countries where the corporate 

tax rate was less than that of the U.S. would not be eliminated but it would be reduced. Leaving aside the liquidity 

advantage to stockholders from a given net return on their 

investment in the form of dividends as compared to appreciation 

in stock values, under the current system of deferral all 

stockholders have an incentive toward foreign investments 

wherever the foreign tax rate is less than that of the U.S., 

other things being equal. Under the integrated system, this 
- 16 -

incentive would exist only for those stockholders whose 

personal tax rate was greater than the foreign corporate 

tax rate. 

For example, in Illustration C, under the current 

system all stockholders would favor Direct-investment 

Corporation A over the domestic corporation, even though 

the former yields a negative net social rate of return, 

because their net return on reinvested profits would be 

$60 as compared to $52 for the domestic corporation. Under 

the integrated system, the 30 percent taxpayer (and all others 

with personal tax rates less than 40 percent) would favor 

the domestic corporation over Direct-investment Corporation A 

since his net return of $70 from the former would exceed the 

net return of $42 from the latter even where profits are 

retained abroad and escape the higher U.S. tax rate. 

To recapitulate, the proposed integrated system would 

work in the direction of reducing U.S. foreign direct investment which was socially unprofitable by making alternative 

investments in the U.S. relatively more profitable to stockholders in U.S. multinational corporations. This effect would be 

greater the higher the foreign corporate tax rate and the lower 

the personal tax rate of the stockholder. The sytem would 

continue the use of the foreign tax credit and tax deferral 

on unremitted profits. 
- 17 -

V. INTERNATIONAL TAX NEUTRALITY 

The basic rationale for the foreign tax credit is that 

it is necessary for the purpose of international tax 

neutrality (ITN). ITN is defined as a situation in which 

differencesin taxation do not affect taxpayers? choices 

between investing at home and abroad. While it is recognized 

that adherence to a policy of ITN by the U.S. may conflict 

with national efficiency by encouraging foreign investments 

which yield a negative net social return, it is justified 

on the grounds of world efficiency in the allocation of 

resources. That is, by encouraging investments to be made 

where the economic rate of return is highest, without the 

encumbrance of the artificial differences created by taxes, 

world output will be maximized. The foreign tax credit is 

also justified in terms of avoiding the "double taxation" 

that would occur if countries did not make allowance for 

each other's taxes. 

The foreign tax credit would not be eliminated under 

the integration plan hypothesized here, but since domestic 

investment would afford a tax advantage to stockholders, 

the plan would constitute a departure from ITN. But the 

validity of the ITN policy is questionable in any case, on 
- 18 -

international as well as domestic grounds, because it takes 

no account of the distribution of income from international 

investment. 

If the economic rate of return on capital is higher 

in Country X than in Country Y, world output may be maximized by neutralizing any tax differences and encouraging 

capital to flow from Y to X; but if the corporate income 

tax imposed by Country X more than offsets the higher 

economic rate of return, the national income of Country Y is 

less than it would be if the investment had been made 

domestically. There is no presumption that world welfare, 

which is the ultimate object of increased output, is maximized by a transfer of income from Country Y to Country X. 

Thus, adherence to the policy of ITN results in arbitrary 

transfers of income, which will continue to occur so long as 

there are different tax jurisdictions and differences among 

countries in their propensities to export and import capital. 

A counter argument is that in the long run the income 

of all countries will be maximized if world output is maximized; hence, the U.S. and other countries should follow an 

internationalist as opposed to a nationalistic policy in this 

respect. Apart from the question of how realistic such a 

position is, it is highly questionable whether a policy of 

ITN is the best way in the long run of eliminating international 

tax distortions. 
- 19 -

It should not be forgotten that the initial cause of 

the distortions which foreign tax credits are designed to 

correct is the corporate income tax itself. If the long run 

view of the ideal world is taken, it is doubtful that there 

would be a corporate income tax, in the U.S. or in any other 

country. The foreign tax credit helps perpetuate the imposition of high corporate taxes by countries which are host to 

sizable amounts of foreign investment, since any rate up to 

nearly 50 percent is a matter of indifference to multinational 

firms. 

It might also be argued that since the taxation of 

income is generally accepted as an equitable way to raise 

revenue, it is appropriate and necessary for countries to tax 

the income of foreign owned corporations since such income 

would otherwise escape taxation by the host country. But this 

implies that income per se should be taxed, regardless of who 

earns it--a proposition lacking in rationale. The justification for taxing income is presumably based on the proposition 

that income is a good measuring rod for determining the amount 

people should contribute toward government expenditures made 

on behalf of the community. While the taxation of foreign 

owned corporations can be justified to the extent that the 

host government undertakes expenditures which directly benefit 

such corporations, foreign investors clearly do not have the 
- 20 -

same obligation to support the host government budget as 

residents. Hence, there is no economic rationale for the 

host country partaking of the fruits of such investment 

beyond what accrues to the factors of production furnished 

by its own residents. 

The foregoing may appear contradictory to the recommendation made earlier that the U.S. should adopt a DRC system 

rather than a DPC system in order to continue the taxation 

of U.S. income flowing to foreign stockholders. But it 

would be pure folly for the U.S. to voluntarily sacrifice 

substantial revenue in the hope that its exemplary conduct 

would move other countries to follow suit. At the same time, 

the U.S. should be prepared to reduce or eliminate the 

taxation of foreign owned corporations on a quid pro quo 

basis with other countries. Thus, the DRC system would 

give the U.S. bargaining power, which the DPC system would 

not, to help move the world toward a more sensible and -6 /

efficient system of taxation. 

-

6/ The realities of international politics were duly noted

by the U.K. Select Committee which, in recommending a 

DRC type system over a DPC system solely because of the 

advantage of the former regarding foreign owned corporations, said, "...the double taxation agreement (between

the U.S. and the U.K.) might be drawn so as to mitigate

this effect but certainly an imputation system strengthens

the hand of the U.K. negotiators." Cf. U.K. Select Committee on Corporation Tax, HMSO, 1971, paras, 12-15. 
- 21 -

In the international negotiations which ensue with 

the change by countries to an integrated system of the DRC 

type, the philosophical question as to how the payment by 

the corporation to the taxicollector is precisely viewed 

becomes critical, at least in logical terms. If the payment 

is viewed not as a corporate income tax but as withholding 

at source of personal income tax due from the dividend 

recipients, there is no case for "withholding" tax on 

dividends paid to nonresidents. On the other hand, if it 

is considered that the payment is a corporate income tax 

and that the credit allowed to the dividend recipients 

is given in order to avoid the double taxation of corporate 

earnings, it can be argued (as the U.S. in fact has done) 

that it is discriminatory to deny a credit for foreign 

taxes paid on dividends received by residents from multinational and foreign corporations. 

If forced to choose between the two, it would be in 

the interests of the United States to opt for the first of 

these two interpretations. U.S. investment abroad is 

considerably greater than foreign investment in the U.S. 

The gains to the United States on account of a switch to 

a DRC system would considerably outweigh the loss of even 

a complete elimination of corporate tax on foreign owned 

investment in the U.S. But other countries, for example, 
- 22 -

France and the U.K,, have initially chosen to have it both 

ways and the U.S. should be equally pragmatic in this 

respect. The U.S. should define the tax at the outset as 

a withholding of personal income tax due to the I.R.S. by 

residents, and state quite candidly that the withholding 

of tax on payments to nonresidents must be continued so 

long as other countries tax the earnings of U.S. corporations. 
- 23 -

VI. QUANTITATIVE EFFECTS OF AN INTEGRATED SYSTEM 

The hypothesized tax change would have the effect of 

making the private interest of shareholders in U.S. corporations coincide with the U.S. social interest with regard to 

the comparative rates of return on foreign and domestic 

investment. Thus, any actions undertaken by U.S, corporations 

on account of the tax change would by definition increase the 

social rate of return on U.S. capital and result in a gain 

in national income and tax revenue. 

In addition to the national income and tax revenue gains, 

the tax change would create an improvement in the social rate 

of return on outstanding and future foreign investment. U.S. 

corporations would have an incentive to resist increases 

and press for decreases in the rates of foreign taxation 

and to switch some investments from relatively high to relatively 

low tax countries. 

There is no need to speculate on the extent to which 

foreign investment is a substitute for or supplement to 

domestic investment, since the question would answer itself 

as a result of the tax change. To the extent that it is 

purely supplemental to domestic investment, no reduction in 

foreign investment would ensue; to the extent that foreign 

investment is a substitute for domestic investment, foreign 

investment would be reduced, resulting in gains in national 

income and tax revenue. In other words, the social cost of 
- 24 -

foreign investment in the absence of a tax change is the 

amount by which national income would be increased by the 

tax reform. 

Viewed strictly from the international standpoint, 

therefore, the tax change would be a "no lose" proposition 

and should be undertaken regardless of how much or how 

little it might increase national income and tax revenue. 

But the international aspects are only one of several 

considerations involved in such a far-reaching reform; if 

they are to carry any weight, it is necessary to have some 

indication of the quantitative magnitudes involved. 

A. Potential Gains in National Income. The methodology 

for estimating the benefit from the proposed tax change is to 

estimate what the social return on foreign investment would 

be in the absence of the tax change and what it would be 

after the tax change. The difference between the two is the 

estimated gain in national income. The social return in any 

year is simply the net social rate of return multiplied by 

the amount of U.S. direct investment outstanding at the 

beginning of the year. 

The data used for this analysis relate only to the 

manufacturing industry because data for other industries 
- 25 -

-7/ 

are insufficient to give meaningful results. The estimates 

for the manufacturing industry can then be used to project 

an estimate of the gain on account of all industries. 

There are two major questions regarding the measurement 

of the rate of return on foreign direct investment. The 

first is whether loans made by the parent firms to their 

foreign affiliates and interest payments thereon should be 

treated the same as equity capital and earnings. Since 

U.S. parent firms have a controlling interest in the great 

majority of their foreign manufacturing affiliates, the 

distinction between debt and equity capital is probably not 

meaningful for the purposes of this discussion. -8/ Therefore, 

debt and equity capital invested by U.S. parents in their 

foreign affiliates are assumed to be equivalent for the purpose 

of assessing rates of retum on U.S. foreign direct investment. 

The second question is whether royalties and fees paid 

by foreign affiliates to U.S. parents should be treated as 

arms-length payments for services received from the parent, 

-

7/ The data for investment in domestic manufacturing are

from the Quarterly Financial Report for Manufacturing

CorDorations., .(various issues) published by the Federal 

Trahe Commission. The data for-U.S. foreign direct investment in manufacturing are from the Survey of Current 

Business (various issues) published by the Department of 

Commerce and from some unpublished sources obtained from 

that department. 

-8/ Grubel, OJ. &., takes the opposite position. 
- 26 -

or whether they should represent a return on capital invested 

in foreign affiliates by parent firms (which are merely 

disguised as something other than dividends for tax or 

other purposes). The truth probably lies somewhere in 

between these extremes. 

Rates of return are shown both ways in the Appendix, 

but the average of the two rates was used in the following 

analysis, Other more technical aspects of compiling the 

data are shown in the Appendix. The rates of return on U.S. 

domestic and foreign direct investment in manufacturing for 

the period 1963-1972 are shown in Table 2. 

Taking the averages for the ten-year period, the net 

return to corporations on foreign direct investment in 

manufacturing was 1.3 percentage points greater than the 

net return to corporations on domestic investment. From 

the standpoint of the national economy, however, foreign 

investment in manufacturing earned 10.1 percentage points 

less than domestic investment in manufacturing. 

The data in Table 2 along with the most recent figures 

for direct investment in manufacturing (1972) serve as the 

starting point for estimating the social return on this 

investment in the future with and without the hypothesized tax 

change. It is necessary to project into the future, as the 
Table 2 

Rates of Return on U.S. Domestic and Foreign Direct 

Investment in Manufacturing, 1963-1972 (X) 

Net Private 

Foreign Direct Incentive 

Domestic Investment Investment to Invest Net Social 

(before tax) (after tax) (after tax) Abroad -1/- Rate of Return -

2/ 

1963 21.5 10.5 12.9 2.4 -8.6 

1964 23.6 12.1 13.8 1.7 -9.8 

1965 26.6 13.9 13.5 -0.4 -13.2 

1966 26.7 13.7 12.5 -1.2 -15.2 

1967 23.2 12.2 10.9 -1.3 -12.3 

1968 25.5 12.8 12.2 -0.6 -13.3 

1969 24.9 12.1 14.0 1.9 -10.9 

1970 18.4 9.8 13.2 3.4 -5.2 

1971 19.6 9.9 13.5 3.6 -6.1 

1972 23.1 11.6 15.7 4.1 -7.4 

Avg . 23.3 11.9 13.2 1.3 -10.1 

-1/ The "net private incentive" is derived by subtracting the after tax rate of return on 

domestic investment from the after tax rate of return on foreign investment. 

-2/ The "net social rate of return" is derived by subtracting the before tax rate of return 

on domestic investment from the after tax rate of return on foreign investment. 
- 28 -

lead time involved in such a major tax change would be fairly 

long. For example, starting from mid-1974, the first year in 

which foreign investment would be affected would probably be 

1977 with the gain to national income lagging at least a year 

behind. The farther one projects into the future, the greater 

the gain becomes, both in absolute terms and as a proportion 

of national income. 

The concept and methodology of estimating the benefit 

from the integrated tax change are best seen in graphic form. 

In Figure 1, which is drawn on a ratio scale in order to 

depict constant rates of growth by straight lines, the line 

ABN represents projections of the book value of direct investment in manufacturing in each year between 1972 and 1988 in 

the absence of a tax change. The projections are based on the 

assumption that direct investment in manufacturing, which was 

$39.5 billion at the end of 1972, will increase at an average 

annual rate of 5 percent in real terms. 

The assumption that a tax change will become effective 

in 1977 produces one or both of two results: a reduction in 

the amount of foreign investment (from what it otherwise 

would have been) and/or an improvement in the net social rate 

of return (compared to what it otherwise would have been). 

Either of these results would increase national income, by 

definition, as noted earlier. 
-29 -

Take the extreme illustration that all future 

increments to foreign investment are eliminated on account 

of the tax change, so that the post-1976 amount of foreign 

investment outstanding levels off to the amount shown by 

the line BC in Figure 1. "he foreign investment (represented 

by the vertical distance between BN and BC in any given year) 

could only have been eliminated because this capital would 

(in the view of the corporations concerned) earn a higher net 

rate of return (both private and social) in some alternative 

investment. (The alternative could be a direct investment in 

the U.S. or a portfolio investment in the U.S. or abroad.) 

Thus, the gain to national income would be the total amount 

of foreign investment eliminated, NC, multiplied by what the 

net social rate of return would have been on this amount in 

the absence of a tax change. 

Now, take the extreme illustration in the other direction, 

that no foreign investment is eliminated by the tax change. 

In this case, the gain to national income would be the number 

of percentage points by which corporations were able to 

improve the after tax rate of return on foreign investment 

multiplied by the total amount of foreign investment. (As 

discussed earlier, corporations could do this by pressing 

foreign countries for lower tax rates and/or by switching 

investments from relatively high to relatively low tax rate 

countries.) 
- 30 -

Figure 1 

Future Book Value of U.S. Foreign Direct 

Investment in Manufacturing Projected at 

5% Average Annual Rate of Increase 

$ Bil. 

90 -

80-

70-

60-

50-

40 -

I 1 1 I 1 

1972 1976 1980 1984 1988 
- 31 -

In practice, of course, the gain would lie somewhere 

between these two extremes--between what the social cost 

of foreign investment would be in the absence of the tax 

change and what it would be with the tax change. Estimating 

the minimum gain is greatly eased if it is assumed that the 

social return on the amount NC would be no worse than zero 

on average, if the tax change were enacted. (If the average 

net social rate of return on NC is zero, then the rate on 

some of this investment would be positive, allowing other 

investment to incur a negative net social rate of return.) 

This assumption is reasonable, since under the hypothesized 

tax scheme, any foreign investment which has a lower rate of 

return after foreign taxes than the rate of return on domestic 

investment before taxes would be relatively unprofitable to 

the owners of the capital in question. It should be noted 

that the relevant comparison is not between the rates of 

return which multinational corporations can earn at home 

or abroad but between the rate of return which individual 

investors can earn on their capital if invested in these 

corporations relative to what these investors can earn on 

their capital in any investment in the U.S. 

To illustrate this point, assume that multinational 

Corporation A believes it can earn 15 percent on an increment of capital invested abroad after foreign taxes but it 
- 32 -

sees no opportunity for earning this much, even before U.S. 

taxes, on a comparable investment in the U.S. From the 

standpoint of the officials of Corporation A, the foreign 

investment would appear worthwhile; but from the standpoint 

of its stockholders, the foreign investment would not appear 

worthwhile if they had the alternative of investing their 

capital in some domestic investment which would earn more 

than 15 percent before U.S. corporate taxes. 

To recapitulate, the initial assumptions are that the 

net social rate of return on capital invested abroad after 

the tax change will be no worse than zero on average and 

that there will be no change as a result of the tax change 

in the net social rate of return on capital invested abroad 

before the tax change. Further, it is postulated that any 

error in these assumptions would be in the direction of 

increasing the gain to national income from the tax change. 

On these assumptions, a minimum estimate of the benefit 

from the tax change can be obtained by estimating the amount 

of new foreign investment that will take place in the absence 

of a tax change and what the net social rate of return would 

be on this investment. 

The margin for error in any estimate of the future 

rate of growth of foreign investment is quite substantial 

in absolute terms, particularly where projections are made 

up to 15 years into the future. Since this analysis is only 
- 33 -

concerned with deriving some estimate for the minimum gain 

from the hypothesized tax change, and since the gain will 

increase with higher levels of future foreign investment 

in the absence of a tax change, only an estimate of the 

minimum growth rate for foreign investment in manufacturing 

in the absence of a tax change was derived. 

Table 3 shows five-year moving averages of the annual 

rates of growth in domestic and direct investment in manufacturing over the 1962-1972 period. Three observations can 

be made concerning the ratio of the rates of growth of direct 

foreign investment to domestic investment (as shown in 

column (3)). First, this ratio never fell below 2.0 for 

the period. Second, there was no evidence of a decreasing 

trend in the ratio. Third, the ratio was generally higher 

the lower the rate of growth of domestic investment. 

This ratio can be used to estimate the minimum rate of 

growth for direct foreign investment in future years. Thus, 

if we take as this miniinum the lowest rate of growth for direct 

investment experienced in any five-year period over the past 

decade, 5.0 percent, the reasonableness of this estimate is 

substantiated by the fact that it could not be any lower without the average annual rate of increase in domestic investment 

being at an improbably low level and/or the ratio of direct 

to domestic investment falling well below any level experienced 
- 34 -

Table 3 

Five-year Moving Averages of Annual Rates of 

Growth in Domestic and Direct Foreign

Investment in Manufacturing,

1962- 1972-k 

1962-67 

1963-68 

1964-69 

1965-70 

1966-71 

1967-72 

1962-72 

(1) (2) (3) 

Tnvestment Investment Dir. to Dom. 

(%I (%) 

4.1 10.8 2.6 

4.4 9.5 2.2 

4.3 8.4 2.0 

3.0 6.0 2.0 

1.6 5.0 3.1 

1.9 5.6 2.9 

3.0 8.2 2.7 

Domestic Domestic Foreign Ratio of 

%Rates of increase are in real terms (1958 dollars).

GNP implicit price deflator for nonresidential 

investment was applied to data in Appendix Table A 

for domestic rates of growth and to Commerce Department

data for book values for direct investment. 
- 35 -

over the past decade. For example, if we took 4.0 percent 

as the estimate for the minimum rate of growth of direct 

investment in the post-1972 period, we would be implicitly 

assuming that the rate of growth of domestic investment 

would be 2.0 percent at most (4.0 percent divided by 2.0, 

the lowest ratio applicable to the 1962-1972 period) or 

that the ratio of direct to domestic investment would fall 

considerably below the ratio prevailing for the 1962-1972 

period. 

If it appears reasonable to assume that direct foreign 

investment in manufacturing will 

5.0 percent in the absence of a 

rate for the net social rate of 

in the absence of a tax change? 

averages for the rates of return 

grow at a minimum rate of 

tax change, what is the best 

return that can be anthcipated 

Table 4 shows five-year moving 

shown in Table 2. 

The variations in the net social rate of return over the 

period were almost entirely attributable to variations in the 

rate of return on domestic investment, which showed a cyclical 

decline in the latter part of the decade due to the sharp drop 

in corporate profits in 1970 and 1971. 

It might be thought that the profitability of foreign 

investment should improve in the post-1972 period as the 

large amount of direct investment made in the 1960's matures 
- 36 -

Table 4 

Five-year Moving Averages of Rates of Return on 

Domestic and Direct Investment in Manufacturing(%) 

Domestic Inv. Direct Inv. Net Social Rate 

(before tax) (after tax) of Return 

1963- 1967 24.3 12.7 -11.6 

1964- 1968 25.1 12.6 -12.5 

1965-1969 25.4 12.6 -12.8 

1966- 1970 23.7 12.6 -11.1 

1967-1971 22.3 12.8 - 9.5 

1968-1972 22.3 13.7 - 8.6 

Source: Table 1 
- 37 -

and becomes more profitable. But it should be kept in mind 

that this discussion is concerned only with the profitability 

of the foreign investment made after 1972 (the amount NC in 

Figure 1) compared to the potential profitability of the 

same amount of investment made in the -U.S. after 1972, and

there is no apparent reason why the former should improve 

relative to the latter in the future. Since there is also no 

reason to expect that foreign corporate tax rates will decline, 

on the whole, from the levels of the 1963-1972 period, it seems 

reasonable to assume that the net social rate of return on 

direct investment in manufacturing will not be significantly 

better than the average for the 1963-1972 period, about -10 

percent. 

Applying these coefficients to Figure 1, estimates were 

derived for the minimum gain in national income as shown in 

Table 5 The estimates should be viewed as a "rock bottom" 

starting point. There are several reasons why the actual 

gain would in all probability be greater. 

First, the projected growth rate of direct investment in 

the absence of a tax change was the lowest average rate for 

any five year period over the past decade. If a growth rate 

equivalent to the average for the 1962-1972 period (8.2 percent) 

was projected, the estimated gains in Table 5 would be 

approximately doubled. 
38 -

Table 5 

Estimated Minimum Increase in National Income 

Resulting from Tax Change on Account of Direct 

Investment in Manufacturing, 1980-1988 

1973 dollars (billions) 

-

1976 -

1980 -

1984 -

1988

1. Minimum level of direct 

inv. in absence of tax 

change (BN) 48.0 58.4 70.9 86.2 

2. Of which: 

a. made prior to 

1977 (BC) b. made after 48.0 48.0 48.0 48,O 

1976 (NC) 10.4 22.9 38.2 

3. Minimum gain in following year resulting

from tax change

(10% of line 2.b.) 1.0 2.3 3.8 

Assumption: (I) Tax change becoming effective in 1977 

(2) In the absence of a tax change direct 

investment in manufacturing will increase 

at average annual rate of 5% in real terms. 

Note: Letters in parentheses refer to lines in Figure 1. 
- 39 -

Second, by applying the average rate of -10 percent 

(the assumed net social rate of return) to the amount NC, 

it is implicitly assumed that to the extent that the gain 

resulted from reduced direct investment, the net social rate 

of return on this amount wouid be no worse than the average 

for all direct investment, the amount BN. In practice, however, it is most probable that investment eliminated on 

account of the tax change would, on the whole, be less profitable than the average, that is, the worst would be the first 

to go. -9/ 

Third, no estimate has been made for the increased 

profitability of the pre-tax change investment, BC. The 

potential for additional gain can be seen from the equation: 

rs = rf (1-t) - rd (1) 

where rs is the net social rate of return, rf is the beforetax rate of return on foreign investment, t is the foreign tax 

rate, and rd is the rate of return on domestic investment 

before taxes. 

9/ Grubel, who made estimates for fourteen individual developed

countries, found that the net social rate of return ranged

from over 6 percentage points worse than the average in the 

least profitable country to nearly 11 percentage points

better than the average in the most profitable country. 
- 40 -

Given the before tax foreign rate of return, rf, as the foreign 

tax rate, t, decreases, the social rate of return, rs, increases. 

If the estimates for rs and rd derived for the 1963-1972 

period (shown in Table 1) are substituted into equation (l), 

and’if it is assumed that the before-tax profitability of direct 

investment in manufacturing is the same as that for domestic 

investment, 23 percent, a coefficient for t can be derived 

as follows: 

-10 = .23(1-t) - .23 

t = .43 

This estimate for the average rate of foreign taxation on 

profits of U.S. subsidiaries (which includes withholding taxes) 

is consistent with the estimates derived by the Internal 

Revenue Service for the year 1964. -

10/ Now assume that multinational corporations are able to reduce t by 5 percentage 

points by pressing foreign host countries for lower effective 

tax rates and/or by switching investment from relatively high 

to relatively low tax rate countries. Then rs, the net 

social rate of return, would be improved to -8.7 percent, a 

-10/ The I.R.S. estimated that foreign taxes (excluding carryover) were 49 percent of total taxable (by the U.S.) income 

from foreign sources. Since this included the relatively

high taxes paid on income by the extractive industries,

the average rate for the manufacturing industry would be 

lower. For European affiliates, for example, the average 

rate was 41 percent. Cf. Foreign Income and Taxes,

Corporation Income Tax Returns, Supplemental Statistics 

of Income, 1964, 1965 and 1966, Internal Revenue Service, 

p. 11, Table 1A. 
- 41 -

gain of 1.3 percentage points to be applied to the amount 

BC in Figure 1. If an improvement of 10 percentage points 

were effected in the average tax rate, the gain in the net 

social rate of return would be 2.4 percentage points. 

Finally, the estimates in Table 5 relate only to direct 

investment in manufacturing and the hypothesized tax change 

would apply to all direct investment, of which manufacturing 

accounted for less than half (42 percent) of total book value 

in 1972. Little statistical information is available on the 

social return of non-manufacturing direct investment. One 

expert in this area has noted that “net foreign returns on 

agriculture, trade and petroleum investments appear to be 

appreciably larger than gross domestic returns. -11/ 

Agriculture and trade together account for only about 

3 percent of total direct investment. Petroleum, which 

accounted for 28 percent of total direct investment in 1972, 

is the big unknown. The sharp increases that have recently 

occurred in the taxation of petroleum by the oil producing 

countries have obviously reduced the comparative advantage 

of direct investment in this industry and it is quite 

possible that some of this investment now has a negative 

net social rate of return. 

Musgrave, -

cit. p.29.
- 42 -

In sum, it is most probable that the total gain in 

national income from the tax change would be two or three 

times greater than the amounts shown in Table 5. Therefore, the following estimates would appear to be reasonable 

approximations of the magnitudes involved. If the proposed 

tax change were to become effective in 1977 the gain in national 

income in 1973 dollars would be about $2 billion by 1981, 

rising to about $8 billion by 1989 and increasing thereafter at a rate greater than the rate of increase of national 

income (assuming that national income would increase at an 

average annual rate of less than 5 percent in real terms). 

These estimates denote the social cost of U.S. direct 

investment, that is, the opportunity cost of a continuance 

of the present system of taxing foreign source income. -

12/

Moreover, the opportunity cost of postponing such a tax 

change for only a few years would be substantial. Assume, 

for example, that instead of becoming effective in the 

earliest practicable year of 1977, the tax change is postponed to 1981. The effect of such a delay is shown by Figure 

2, which is identical to Figure 1 except that the lines B'C' 

-

12/ In fact, the opportunity cost of the present system is

even greater than this because another alternative, the 

outright elimination of the foreign tax credit and tax 

deferral, would be even more effective in improving the 

net social rate of return on direct investment, 
- 43 -

and BID have been added to denote the additional foreign 

investment that would be unaffected by the tax change on 

account of the postponement. 

The cost of the delay would be the net social rate 

of return multiplied by the vertical distance between BB' 

and BD for the years 1977-1980 plus the net social rate of 

return multiplied by the amount B'D for each year thereafter. 

In quantitative terms this would amount to an average annual 

cost of about $0.6 billion for the years 1977-1980 and about 

$1.0 billion for each year thereafter. If these figures are 

doubled per above (to obtain estimates above the "rock bottom" 

estimates of Figures 1 and 2), the cost of the delay is estimated at over $1 billion for each of the years 1977-1980 and 

about $2 billion for each year thereafter, 

B. Potential Gains in Tax Revenue. An approximation 

of the proportion of the national income gain which would 

accrue to the tax collector can be derived as follows: 

Since the national income gain would be in the form of 

increased corporate profits before tax, the average effective 

tax rate would depend in the first instance on the extent 

to which these profits were distributed to stockholders. 

This distribution ratio could vary between zero, in which 
- 44 -

Figure 2 

Postponement of the Tax Change

(Figure 1 with addition of B'C' and B'D) 

$ Bil. 

90 -

80 -

70 -

60 -

50 -

I I I I I 

1972 1976 1980 1984 1988 

I 
- 45 -

case the effective tax rate would be about 48 percent, EJ/ 

and 100 percent, in which case the effective tax rate would 

be equivalent to the weighted average of the marginal tax 

rates of the individual dividend recipients. 

On the basis of a study by the Treasury on dividend 

distributions in 1966 which entered the base for the 

individual income tax, some 20 to 25 percent of distributions 

would escape the individual income tax. The average effective 

individual income tax rate on dividend receipts reported to 

the Internal Revenue Service is about 35 percent. These ratios 

would give an effective tax rate on dividends distributed of 26 

to 2% percent (75 to 80% of 35%). In the absence of a reduction in the schedule of indiv�dual tax rates, however, the 35 

percent average tax rate will increase in the future as money 

incomes rise, It is also questionable whether individuals and 

institutions who are exempt from the income tax would be 

allowed a full credit and tax rebate for corporate taxes under 

an integrated system. Continuing efforts to broaden the 

individual income tax base should reduce the proportion of 

dividends that escape taxation. On the basis of these trends 

and prospects, it would seem reasonable to assume that the 

tax revenue from the increments of dividends distributed in 

the future as a result of the integrated tax change would be 

-13/ Because the first $25,000 of corporate earnings is taxed

at 22 percent the effective corporate tax rate never 

quite reaches 4% percent. 
- 46 -

at least 30 percent of these distributions. 

The efficacy of the proposed integrated system is predicated 

on the assumption that it would cause a high proportion of 

corporate earnings to be distributed, and therefore, taxed 

at the individual level. Nevertheless, some of the incremental 

corporate income would undoubtedly be retained by corporations 

and bear the 48 percent tax. On a weighted average basis, then, 

the effective rate would be somewhat above 30 percent. A reasonable approximation would be that tax revenue gains would be about 

one-third of the national income gain. 
- 47 -

APPENDIX 

Sources and Methodology for Computing Rates of Return 

on Domestic and Direct Investment in Manufacturing 

The source for U.S. domestic manufacturing investment 

is Quarterly Financial e Report for Manufacturing Corporations,

Federal Trade Commission, Washington, D.C., issues for various 

quarters from 1962 through 1971. Data for stockholders' 

equity are as of the beginning of each year. 

The source for foreign direct investment is the Survey 

-of Current Business, Commerce Department, Washington, D.C., 

issues for November 1972 and September 1973 and unpublished 

data from the Commerce Department for the years 1963-1968. 

Data on book values are as of the beginning of each year. 

Rates of return for foreign direct investment are 

earnings for each year as a percentage of book value as of the 

beginning of the year. 

Petroleum refining was subtracted from the totals for 

U.S. investment in order that the data for domestic manufacturing would be on the same basis as the data for manufacturing 

by foreign direct investment affiliates, which did not include 

petroleum refining. 

The FTC data for the book value of and earnings from foreign 

direct investment in manufacturing was adjusted on the assumption 
- 48 -

that corporations reporting to the FTC on the whole would 

include the assets and earnings of their foreign affiliates. 

Although the reporting instructions called for reporting 

only assets and earnings derived from investments in the 

U.S., the FTC believed that in recent years corporations had 

on the whole been reporting world-wide operations on a consolidated basis. To the extent that assets and earnings of foreign 

affiliates were not in fact included in the FTC data, the 

subtraction resulted in a slight overestimate of the rates of 

return on domestic investment in manufacturing. 

"Adjusted earnings" includes branch earnings, dividends 

paid to U.S. parent firms (net of foreign withholding taxes) 

reinvested earnings by foreign subsidiaries and interest payments to U.S. parent firms. "Broad earnings" includes these 

same categories plus royalties and fees paid to the U.S. parent 

firms. 

"Net private incentive" is the after tax rate of return on 

foreign direct investment minus the after tax rate of return 

on domestic investment. 

"Net social rate of return" is the rate of return on foreign 

direct investment minus the rate of return on domestic investment before tax. 
- 49 -

No adjustment was made for U.S. taxes paid on account of 

income from foreign affiliates; thus, after tax rates of return 

on domestic investment were somewhat underestimated. It was 

possible to make crude estimates for these amounts for some 

years, but the error involved in ignoring this consideration 

was believed to be small. For example, a crude estimate indicated 

that only about 2 percent of total U.S. taxes paid by U.S. 

manufacturing corporations was on account of foreign source 

income. 

Adjustments for exchange rate changes over the period 

were not considered worthwhile because the error was believed 

to be insignificant. The possible error could be derived from 

the fact that book values of foreign direct investment, as 

compiled by the Commerce Department, would not reflect changes 

in the value of the dollar relative to other foreign currencies, 

while earnings which had been converted from foreign currencies 

into dollars would reflect such changes. The extent to which 

U.S. foreign affiliates kept books in dollars, in which case 

there would be no error, was not known. Also, of the countries 

where U.S. investment in manufacturing would be significant, 

appreciations of the dollar over the period would approximately 

offset depreciations of the dollar. 
Computation of Rate of Return on u.S. InveFtnent in biacufacturiLig in U.S. (Before TZX) 

(Money amounts in billions of dollars) 

: 1963 : 1964 : 1965 : 1966 : 1967 : 1968 : 1969 : 1970 : 1971 : L972 

1. Total stockholders' equity, "-911 

xenufacturing corporations" Li 184.3 192.4 203.6 218.1 236.8 254.3 273.2 297.1 310.9 327.1 

2. Minds: ecjility in petroleurn refining 32.6 34.6 "36.5 38.5 41.7 45.1 48.1 51.4 54.7 57.7 

3. Equals: stockholders' equity in 

manufacturing excluding petroleum 

refining 151.7 157.8 167.1 179.2 195.1 209.2 225.1 245.7 256.2 2GSr.4 

4. Xinua: book value of U.S. foreign 

direct investmsnt in manufa=tdring 13.3 14.9 16'. 9 19.3 22.1 24.2 26.4 29.5 32.3 35.6 

5. Pquals: stockhoiders' equity in 

csn,dfacturing corporations attributablo to assets in U.S. 138.4 142.9 150.2 159.9 173.0 185.0 198.7 216.2 223.9 233.8 

6. Nst profit before Federal income 

tax, "All manufacturing corporations" 34.9 39.6 46.5 51.8 47.8 55.4 58.1 48.1 53.2 6 :1 .2 

7. I'dinus: profit from petroleum re­ fi:iinq 4.3 4.7 5.2 6.0 6.3 6.6 6.9 5.8 6.7 6.4 

8. Equals: net profit before incorne tax I cf nan i: fa cturin g corporations ex c1udIns petroleum refining 30.6 34.9 41.3 45.8 41.5 48.8 51.2 42.3 46.5 5G.8 Cn 

9. Ninus: earnings of foreign affiliates 0 

(a) adjusted basis 0.7 0.9 1.1 1.1 1.2 1.3 1.3 1.9 2.0 2.1 I 

(5) broad basis 1.1 1.4 1.7 1.8 1.9 2.1 2.2 2.9 3.1 3.4 

10. Ecyals: earninys before tax of U.S. 

rnaufacturing corporations attributable to assets in U.S. 

(a) adjusted bnsis 29.9 34.0 40.2 44.7 40.3 47.5 49.9 40.4 44.5 54.7 

(b) broad basis 29.5 33.5 39.6 44.0 39.6 46.7 49.0 35.4 42.4 53.4 

11. Rate of return (line 10 line 5) 

(a) aejusted basis. (%) 21.6 23.8 26.8 78.0 23.3 25.7 25.1 18.7 19.9 33.4 

(5) broad basis (S) 21.3 23.4 26.4 27.5 22.9 25.2 24.7 18.2 14.4 22. 6 

L'AlI data on stockholders' equity and book values are of the beginning of the year.