A. Determine the tax disadvantage to organizing a U.S. business today as a corporation, as compared to a partnership, under the following conditions. Assume that all earnings will be paid out as cash dividends. Operating income (operating profit before taxes) will e $500,00 per year under either organizational form. The tax rate on corporate profits is 35% (Tc =0.35), the average personal tax rate for the partners is also 35% (Tp- 0.35), and the capital gains tax rate on dividend income is 15%(Tdiv =0.15).
B. Now recalculate the tax disadvantage using the same income but with the maximum ax rates that existed before 2003. (These rates were 35% (Tc = 0.35) on corporate profits and 38.6% (Tp= 0.386) on personal investment income.)