Corporate tax rate

Had today s marginal corporate tax rate (34 percent) been in effect at the time the NCEs in DiMasi s study were developed, the net after-tax cash outlay per successful NCE would have been no more than 80.1 million, and the full cost capitalized at a 10 percent cost of capital would be 171 million. At today s tax rate, with a cost of capital decreasing from 14 to 10 percent over the life of the project, the average cost of developing a new drug would be no more than 237 million. 

Second, taxes owed or payable depend not only on what is manufactured and sold but also on where it is manufactured. Drug companies can and do make decisions to manufacture products in jurisdictions that will afford them the best profile of after-tax cash flows. The availability of tax credits for locating manufacturing operations in U.S. possessions, such as Puerto Rico, substantially reduces the tax liability of pharmaceutical companies. (See chapter 8 for more detail.) Thus, the opportunity to make a new product in a low-tax jurisdiction means that the extra taxes incurred as a result of the introduction of a new group of products will certainly fall short of the statutory marginal corporate tax rate. 

Taken together, these measurement problems imply that the U.S. marginal corporate tax rate is too high a rate to apply to the cash flows associated with a new product after it is introduced to the market. A better approximation of the tax burden would be based on the ratio of taxes paid to income from ongoing pharmaceutical operations.22... 

Because effective corporate tax rates in Puerto Rico are substantially lower than in the United States, this tax credit represents a major form of Federal tax expenditure for pharmaceutical firms. Although little actual pharmaceutical R D is done in Puerto Rican locations (245), the credit may lead to more manufacturing jobs in the... 

Loss, I.S., and Morgenstem, AD., Pharmaceuticals/ Tax Policy A Successful Puerto Rican Statehood Initiative Will Result in Higher Corporate Tax Rates for Many Companies (Washington, DC The NatWest Investment Banking Group, 1990). 

Leland (1994) studied also the behavior of risky interest rates and yield spreads for unprotected debt. He finds that greater coupons and bankruptcy costs increase the yield spread. Conversely, a greater corporate tax rate decreases the spread because the value of debt will rise. 

In the early 1980s corporate tax rates in most of the developed countries in the world were relatively high in the 48-50% range, and had little impact... 

The result of this decrease in corporate tax rates across the globe may affect the investment of capital around the world. The combined corporate tax rates for the five highest member countries in OECD are ... 

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