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You are a shareholder in a corporation
- You are a shareholder in a corporation.
- The corporation earns $4 per share before taxes.
- How much is left for you after all taxes are paid? What is your total effective tax rate
- The corporate tax rate is 34% and the personal tax rate on dividend income is 15%.
- Once it has paid taxes it will distribute the rest of its earnings to you as a dividend.
Expert Solution
- Solution
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- First, the corporation pays taxes. It earned $4 per share, but must pay 0.34 × $4 = $1.36 to the government in corporate taxes.
- That leaves $2.64 to distribute. However, you must pay
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0.15 × $2.64 = $0.396 in income taxes on this amount, leaving $2.64 – $0.396 = $2.244 per share after all taxes are paid.
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- As a shareholder you only end up with $2.244 of the original $4 in earnings. The remaining $1.36 + $0.396 = $1.756 is paid as taxes.
- Thus, your total effective tax rate is $1.756 ÷ $4 = 43.9%.
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