1. Willard Taylor, a tax attorney with Sullivan & Cromwell LLP, is contemplating the latest trend among U.S. firms that have been opting to become corporations. Until recently, it was unusual for U.S. family owned companies or partnerships to "go public" by incorporating in another nation and selling shares of stock to residents of other nations. A decade ago, only about 1 percent of U.S. companies that became corporations did so outside the United States. During each of the past three years, however, more than 20 percent of U.S. firms choosing corporate structures have decided to incorporate abroad.

As a tax lawyer, Taylor pays close attention to tax rates assessed on corporations based abroad, as well as those that apply to U.S. corporations. The governments of most countries, Taylor realizes, have slashed their corporate tax rates in recent years, whereas the U.S. corporate tax rate has remained unchanged at 35 percent. The result, Taylor notes, is that the U.S. corporate tax rate is now second highest in the world, which provides a strong incentive to incorporate elsewhere. Taylor asks, "What are the pluses and minuses of being incorporated in the U.S. versus somewhere else?" He deduces that given the strong incentive provided by lower corporate tax rates abroad, "Very often, depending on what the business is, you'll conclude that there are no pluses to being in the United States."

a. How have lower foreign tax rates affected the incentive to incorporate abroad?

b. What do you suppose has happened to federal collections of corporate taxes?