A corporation has a tax rate of 36%. If the corporation’s shareholders are taxed at a...

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?

Expert Solution


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

jeff jeffy answered 2 years ago

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