3. Consider the effect that corporate profit taxes have on investing.

Look back at Figure 15.4. Suppose that the r line is the rate of return a firm earns before taxes. If corporate profit taxes are imposed, the firm’s after-tax returns will be lower (and the higher the tax rate, the lower the after-tax returns). If the firm’s decisions about R&D spending are based on comparing after-tax returns with the interest-rate cost of funds, how will increased corporate profit taxes affect R&D spending? Does this effect modify your views on corporate profit taxes? Discuss. LO15.3