WK1 Homework - WEEK 1 HOMEWORK P1-1 Calculate the tax...

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1 WEEK 1 HOMEWORK P1-1. Calculate the tax disadvantage to organizing a U.S. business today, after passage of the Jobs and Growth Tax Relief Reconciliation Act of 2003, as a corporation versus as a partnership under the following conditions. Assume that all earnings will be paid out as cash dividends. Operating income (operating profit before taxes) will be $500,000 per year under either organizational form; the effective corporate profits tax rate is 35 percent ( τc = 0.35); the average personal tax rate for the partners of the business is also 35 percent ( τp = 0.35); and the capital gains tax rate on dividend income is 15 percent ( τcg = 0.15). Then, recalculate the tax disadvantage using the same income but with the maximum tax rates that existed prior to 2003. These rates were 35 percent ( τc = 0.35) on corporate profits and 38.6 percent ( τp = 0.386) on personal investment income. Today (under provisions of the Tax Relief Act of 2003). If the firm is organized as a partnership, operating income will be taxed only once, so investors will receive $500,000 × (1 0.35) = $325,000. If
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