Question

Calculate the tax disadvantage ( = corporate after-tax income to owners - sole proprietorship after-tax income to owners) to organizing a U.S. business as a corporate versus a sole proprietorship under the following conditions: Assume that all earnings will be paid out as cash dividends. Operating Income (operating profit before taxes) will be $116 under both organizational forms. The effective corporate tax rate = Tc = 40%. The average personal tax rate for the owners is 45% and assume that rate applies to the dividends (i.e. assume there is no cap on rate that dividends are taxed at and thus they are taxed at the personal tax rate). Answer to 2 decimal places.

Answer 1