Question

A corporation has a tax rate of 36%. If the corporation’s shareholders are taxed at a rate of 40% on dividend income, what is the effective tax rate on this corporation’s income, considering the taxation at both the corporate and the individual levels?

Answer 1

	Effective tax rate for corporation is nothing but the tax paid on profits arrived before paying any tax
	Effective tax rate	=	Amount of tax paid / Total income earned (before paying any tax)
	Corporation tax rate	=	36%
	Individual tax rate	=	40%
		For example
		Assume that the corporation eared the Pre-tax income of 1000
		and distributed the dividend to its shareholders 10% of its pre-tax income
		That is, Divinded = 1000*10% = 100
		Amount of tax that paid by corporation = [1000-100(dividned)]900*36%	=	360
		Amount of tax paid by Individual on dividned income = 100*40%	=	40
						Total tax paid		400
						Total pre-tax income		1000
						Effective tax rate	400/1000	40%	#
		# the effective tax rate varies based on the dividend income distributed by the company to its shareholders