Suppose that, in an effort to reduce the federal deficit, Congress increases the top personal tax...

Suppose that, in an effort to reduce the federal deficit, Congress increases the top personal tax rate on interest and dividends to 38% but retains a 12% tax rate on realized capital gains. The corporate tax rate stays at 40%. Assume capital gains are 50% of equity income.

a. Compute the total corporate plus personal taxes paid on each $1 of debt income. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Total tax $

b. Compute the total corporate plus personal taxes paid on each $1 of equity income if all capital gains are realized immediately. (Do not round intermediate calculations. Round your answer to 4 decimal places.)

Total tax $

c. Compute the total corporate plus personal taxes paid on each $1 of equity income if all capital gains are deferred forever. (Do not round intermediate calculations. Round your answer to 4 decimal places.)

Total tax $

Solutions

Expert Solution

Congress

a. Compute the total corporate plus personal taxes paid on each $1 of debt income.

Corporate tax = 0
Personal tax = (0.38)( 1) = 0.38
Total = 0.38

b. Compute the total corporate plus personal taxes paid on each $1 of equity income if all capital
gains are realized immediately.

Corporate tax = (0.40)(1) = 0.40
Personal tax = (0.38)(0.5)(1 – 0.40) + (0.12)(0.5)( 1 – 0.40) = 15
Total = 0.55

c. Compute the total corporate plus personal taxes paid on each $1 of equity income if all capital
gains are deferred forever.

Corporate tax = (0.4)(1) = 0.40
Personal tax = (0.38)(0.5)(1 – 0.4) = 114
Total = 0.514

ekkarill92 answered 2 years ago

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