 # Effective tax rate

Hi guys, Could you pls help me to retablish the formula to calculate the Effective tax rate on earnings paid out as dividend in the exemple below ?? and what concretely is the individual tax rate? is this the tax rate that the shareholder receiving dividend have to pay on the amount received??? International Pulp, a Swiss-based paper company, has annual pretax earnings (in Swiss francs) of SF 600. The corporate tax rate on retained earnings is 55%, and the corporate tax rate that applies to earnings paid out as dividends is 30%. Furthermore, International Pulp pays out 30% of its earnings as dividends and the individual tax rate that applies to dividends is 40%. What is the effective tax rate on corporate earnings paid out as dividends? A) 48%. B) 58%. C) 55%. D) 70%. (correct answer : B) Thanks you !!!

The wording of this question is really confusing. The answer is: 600*0.3= 180 dividends 180*0.3=54 tax on dividends, hence 126 are dividends 126*0.3=50.4 tax on individual income (from dividends in this case) total taxes paid 54+50.4=104.5 Effective tax rate 104.5/180=0.58 or 58% Milos

so effective tax rate for dividends incorporates tax that recipents of dividend pay as well?

As I said, the wording is really confusing. It should ask as to calculate “effective tax rate on dividends” not “effective tax rate on corporate earnings paid out as dividends” (basically, that’s the same thing). @Pepp Of course, that’s the key of double taxation. First, corporations pay taxes on their income, then they distribute it, and than we receive dividends which increase our overall income which is taxed separately. So the same amount is taxed twice (once as corporate income and once as personal income of stockholders), hence the effective tax rate increases. Hope this helps! Milos

but then 58% is not effective tax rate for corporation, its the effective tax rate for dividends. Corp still is paying only their share of tax for dividend. They don’t care what you as an investor pay.

nhung.tran Wrote: ------------------------------------------------------- > Hi guys, > > Could you pls help me to retablish the formula to > calculate the Effective tax rate on earnings paid > out as dividend in the exemple below ?? > > and what concretely is the individual tax rate? is > this the tax rate that the shareholder receiving > dividend have to pay on the amount received??? > > > International Pulp, a Swiss-based paper company, > has annual pretax earnings (in Swiss > francs) of SF 600. The corporate tax rate on > retained earnings is 55%, and the corporate tax > rate that applies to earnings paid out as > dividends is 30%. Furthermore, International Pulp > pays out 30% of its earnings as dividends and the > individual tax rate that applies to dividends is > 40%. > What is the effective tax rate on corporate > earnings paid out as dividends? > A) 48%. > B) 58%. > C) 55%. > D) 70%. > > (correct answer : B) > > Thanks you !!! This is more of a math problem than anything. Just take 100 as an example. (100*.3)+((100*.3)*.4) =42—> 1-42=58 --> 58/100 = 58%.

Pepp They are asking for effective tax rate “on corporate earnings paid out as dividends”, i.e. effective tax rate that is paid on that amount. Nobody asks us to calculate effective tax rate for corporation. My 0.02\$ Milos

The formula is: Effective tax rate = corporate tax rate (on dividends) + (1- corporate tax rate)(individual tax rate. Therefore, effective tax rate = 0.3 + (1-0.3)*.4 = 0.58 = 58%.

what LOS / R#/ SS does this come under ? and nhung.tran … if you dont mind where did you get this query from ?

<<<<< Of course, that’s the key of double taxation. First, corporations pay taxes on their income, then they distribute it, and than we receive dividends which increase our overall income which is taxed separately. So the same amount is taxed twice >>> HENCE SOME FIRMS OPT TO REPO SHARES INSTEAD OF NAIL INVESTORS WITH THE TAX BURDEN

jdoshi Wrote: ------------------------------------------------------- > The formula is: > > Effective tax rate = corporate tax rate (on > dividends) + (1- corporate tax rate)(individual > tax rate. > > Therefore, effective tax rate = 0.3 + (1-0.3)*.4 = > 0.58 = 58%. YEAH the formula is exactly the schewser’s answer but I still couldn’t understand it, I see it better with Milos’exemple, so Jdoshi can you pls explain more about this formula (why (1- corporate tax rate)(individual tax rate) should be additional tax rate ???) @ Dairus : this question is from Q bank

nhung.tran Wrote: ------------------------------------------------------- > jdoshi Wrote: > -------------------------------------------------- > ----- > > The formula is: > > > > Effective tax rate = corporate tax rate (on > > dividends) + (1- corporate tax rate)(individual > > tax rate. > > > > Therefore, effective tax rate = 0.3 + (1-0.3)*.4 > = > > 0.58 = 58%. > > YEAH the formula is exactly the schewser’s answer > but I still couldn’t understand it, I see it > better with Milos’exemple, so Jdoshi can you pls > explain more about this formula (why (1- corporate > tax rate)(individual tax rate) should be > additional tax rate ???) > > @ Dairus : this question is from Q bank You dont understand taxes…you just pay them! @strangedays : I get so… but not looking for it at all I am not sure what the confusion is but let me explain you what I have understood. Effective tax rate is the percentage of total tax paid at corporate and individual levels. Which is the premise of double taxation. So, on \$1 in profit a company pays tax at corporate level and then if the entire remaining portion of the profit is distributed to the shareholders they pay tax on dividends at their individual tax bracket. So for our example if a company made \$1 in profit it pays 1*0.3 = \$0.3 in taxes then the remaining amout of \$0.7 is distributed to a sharesholder on which he will pay 0.7*0.4 = \$0.28. So the total tax paid is 0.30 + 0.28 = 0.58. So the effective tax rate is (0.58/1)*100 = 58%. I hope this helps.

If u want to how the formula is derived: Profit = P Corporate tax rate = C Individual tax rate = I. total tax = P * C + P * (1-C) * I Effective tax rate = Total tax / Profit. = { P * C + P * (1-C) * I }/P taking P out we can rewrite the equation as = P {C + (1-C)*I}/P = C + (1-C) * I.

what chapter is this formula in

Hey What chapter is this formula in?