2. The economic staff of the U.S. Department of the Treasury has been asked to r

ID: 1178602 • Letter: 2

Question

2. The economic staff of the U.S. Department of the Treasury has been

asked to recommend a new tax policy concerning the treatment of the

foreign earnings of U.S. firms. Currently the foreign earnings of U.S.

multinational companies are taxed only when the income is returned to

the United States. Taxes are deferred if the income is reinvested abroad.

The department seeks a tax rate that will maximize total tax revenue

from foreign earnings. Find the optimal tax rate if:

a. B(t) =80 -100t

b. B(t) =80 - 240t2

c. B(t)= 80 -80?t

where B(t) is the foreign earnings of U.S. multinational companies

returned to the United States and t is the tax rate.

Differentiating all three equations with respect to t. We obtain t = 0 in all three cases in order to get maximum benefit

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