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Unformatted text preview: on their investment portfolios, they can spend only the returns that they have left after taxes.
Strategies that yield attractive pre-tax returns can generate sub-standard after tax returns.
How big of a drag are taxes on investment returns? An examination of the returns
on the U.S. stock market and on government bonds indicates that stocks have generated
much higher returns than treasury bills or bonds. Thus, $ 100 invested in stocks in 1928
would have grown to $ 125,599, by the end of 2001, significantly higher than what your
portfolio would have been worth if invested in T.Bills ($1,713) or T.Bonds ($3,587). This
is impressive but it is also before taxes and transactions costs. For the moment, consider the
effects of taxes on these returns. Assume that the investor buying these stocks faced a tax
rate of 35% on dividends and 20% on capital gains over this period. To compute the effect
of taxes on returns, you do have to consider how often this investor trades. If you assume
that he turns over his entire portfolio at the end of each year,...
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This note was uploaded on 01/17/2012 for the course ECON 101 taught by Professor Econnorm during the Spring '11 term at Art Institutes Intl. Minnesota.
- Spring '11