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Chapter 7: Problem 1

In \(1989,\) corporate tax rates in some regions of the United States fell to their lowest level in 15 years, while the rates in other regions reached new highs. In \(1974,\) similar conditions led to a large flight of companies from regions with unfavorable corporate tax policies to regions with favorable policies. There was, however, considerably less corporate flight in 1989 Which of the following, if true about \(1989,\) most plausibly accounts for the finding that there was less corporate flight in \(1989 ?\) A. The regions with the most favorable corporate tax policies had many of the same types of corporations as did those with unfavorable tax policies, but this was not true in 1974 B. In contrast to \(1974,\) office rental costs in the regions with the most favorable corporate tax policies were significantly higher than rental costs in other areas of the country. C. In contrast to \(1974,\) in \(1989,\) the areas with the most favorable corporate tax policies reaped the most benefit from tax incentives, although the tax codes were particularly difficult to decipher. D. Tax incentives offered by foreign countries were higher in 1989 than in 1974 E. Individual tax incentives in the areas with favorable corporate tax policies were slightly lower than they were 15 years earlier in areas with favorable corporate tax policies.

Short Answer

Expert verified
Based on the solution steps, Option B - that rental costs in regions with the most favorable corporate tax policies were higher in 1989 than in other regions as opposed to 1974 - offers the best and most plausible explanation for why there was considerably less corporate flight in 1989. Options A, C, D and E are either incoherent with the presented information, irrelevant, or their impact would be too small to lead to 'considerably less' corporate flight.

Step by step solution

01

Analyzing Option A

Option A suggests that in 1989, the same types of corporations were found in regions with both high and low taxes, which was not the case in 1974. However, this would suggest, if anything, less motivation to move in 1974, which is contrary to the presented facts.
02

Analyzing Option B

Option B posits that rental costs in low-tax areas were higher in 1989 than in other regions, unlike in 1974. This presents an additional cost to relocating to low-tax regions in 1989 which could counterbalance the lower tax, explaining the reduced rate of corporate flight.
03

Analyzing Option C

Option C suggests that regions with the most favorable corporate tax policies in 1989 provided the most benefit from tax incentives, despite difficult tax codes. This would seem to incentivize more corporate flight rather than less, so it cannot explain the given scenario.
04

Analyzing Option D

Option D states that foreign countries offered more tax incentives in 1989 than in 1974. This doesn't explain why there would be less internal corporate flight within the United States.
05

Analyzing Option E

Option E suggests that individual tax incentives in areas with favorable tax policies were slightly lower than they were 15 years earlier. This might slightly discourage migration to these areas, but the effect would be small if the decrease was only 'slight'.

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