Question

Assume that the corporate tax rate is 34% and the personal tax rate is 32%. The founders of a newly formed business are debating between setting up the firm as a partnership versus a corporation. The firm will not need to retain any earnings, so all of its after-tax income will be paid out to its investors, who will have to pay personal taxes on whatever they receive. What is the difference in the percentage of the firm's pre-tax income that investors actually receive and can spend under the corporate and partnership forms of organization? Group of answer choices 23.12% 24.74% 19.88% 22.20% 25.43%

Answer 1

23.12%

Step-by-step explanation:

Calculation for the difference in the percentage of the firm's pre-tax income

First step is to multiply the difference between the two tax rate using this formula

Tax rate difference = (1 - Corporate tax rate)*(1 - Personal tax rate)

Tax rate difference= (1 - 34%)*(1 - 32%)

Tax rate difference=0.66*0.68

Tax rate difference= 0.4488*100

Tax rate difference=44.88%

Second step is to find the difference in the percentage of the firm's pre-tax income

Percentage of Pre-tax income difference =(1 - Personal tax rate)-Tax rate difference

Let plug in the formula

Percentage of Pre-tax income difference =(1 - 32%) - 44.88%

Percentage of Pre-tax income difference=0.68-0.4488

Percentage of Pre-tax income difference=0.2312*100

Percentage of Pre-tax income difference=23.12%

Therefore the difference in the percentage of the firm's pre-tax income will be 23.12%