Question

Suppose that Congress sets the top personal tax rate on interest and dividends at 43% and the top rate on realized capital gains at 19%. The corporate tax rate stays at 22%. Assume capital gains are half of equity income. a. Compute the difference between the total corporate plus personal taxes paid on debt and the total taxes on equity income if all capital gains are realized immediately. (Do not round intermediate calculations. Round your answer to 4 decimal places.) Difference b. Compute the difference between the total corporate plus personal taxes paid on debt and the total taxes on equity income if all capital gains are deferred forever. (Do not round intermediate calculations. Round your answer to 4 decimal places.) Difference

Answer 1

Personal Tax 43% Capital Gaim rata 19% Corporate Tax Seelez 22% a) for $104_dubt_imcome Corporate Tax a $0 Pusonel Tas ; 0.43 x 1 2 0.4300 Toral 20.4300 for $_1 equity imlomme, with all capital Gaim le aliged immediakly : Corporate Tax 0.22x $1 = 0.2200 Personal Tax > 0.43 x 0.5 * [I - (0.22x61) _ +0.19 x 0.5 x 11 - 0.22x82) 2) 0.1677 +0.7 0.0741 2) 0.2418 Torele 0.2200 +0.2418 0.4618 Diference 2_0.4300 - 0.4618 -0.0318 b) for $1 equity_imcome with all cabihal Gaim differed forever Corberak Tax = 0.22 x $1 -0.2200 Personal Tax > 0.43 x 0.5 [1-1022 *$1) " 0.1677 Toral = 0.3877 Difference 2 0.4300 - 0.3877 0.0423

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