Tax Drag % versus Tax Rate for Annual Accrual Tax Formula

CFA Level III
#1

When you have an annual accrual tax rate over 1 period is it true that your tax drag % will equal your tax rate, unlike all other instances where the tax drag is greater than the tax rate?

  • [1+R(1-t)]^n is the formula
  • $1,000 * [1 + 10% ( 1 - 50% )]^1 = (1.05 * $1,000) = $1,050 = FVIF
  • So gain(AT) = $50 ($1,050-$1,000)
  • gain (No T) = $100 ($1,000 * 1.1)
  • gain(AT)/gain (no T) = $50/100 = 50% tax drag = tax rate of 50%
#2

Yes of course your equation will be the same as capital deferred gain where you are taxed once only.