Question

Consider a C corporation. The corporation earns $1 per share before taxes. After the corporation has paid its corresponding taxes, it will distribute 0% of its earnings to its shareholders as a dividend. The corporate tax rate is 35%, the tax rate on dividend income is 28%, and the personal income tax rate is set at 28%. What are the shareholder's earnings from the corporation after all corresponding taxes are paid? Note: Express your answers in strictly numerical terms. For example, if the answer is 5%, enter 0.05 as an answer; or if the answer is $500, write enter 500 as an answer."

Answer 1

Effective tax on corporate earnings = Total tax expense / Earrings before tax

Earnings before tax = $ 1 per share

Corporate tax = $ 1 * 35% = $ 0.35

Earnings after tax = $ 1 - 0.35 = $ 0.65

Company distribute 0% of earrings after tax distribute as a dividend

Dividend amount = Earnings after tax * 0% = 0

The company not distributing dividends, so there is no tax paid on dividend income by investors.

Total tax expense = total tax paid by company = $ 0.35

Effective tax rate on corporate earnings = $ 0.35 / 1 = 0.35