# Effective Tax Rate

Schweser Book 4, p.63: Effective tax rate under a split-rate system The general discussion is about the double taxation of earnings at the corporate (earnings) and individual (dividends) levels: Shouldn’t the answer be: Effective tax rate on income distributed as dividends = 35% + [(1-35%) x 20%] = 48% To add to the confusion, the answer is the same both ways…

I’m not using their formulas for this calculation. I’m looking at it like this… There is 300 earnings, with 50% payout to dividends, at 20% taxrate on corporate dividends. Then a 35% individual tax rate on dividends for individuals. So \$300, of which \$150 is dividends. Of this \$150, 20% goes to tax, or \$30 dollars. Then \$120 (150-30) is distrubuted to the individual. Of this 35% goes to tax, or \$42. Therefore \$72 total went to tax, out of \$150 assigned to dividends. Therefore the effective tax rate is 72/150 = 48% That’s how I’m looking at it…

Sorry for not getting back earlier. I think I was in error with my above suggestion. I did find it confusing: The corporate tax rate on retained earnings The corporate tax rate that applies to earnings paid out as dividends The individual tax rate that applies to dividends Earlier, I failed to see the distinction between earnings distributed as dividends (lower rate) vs. those distributed as retained earlings (the split rate corporate tax system). Sorry, dude.