Problem: Max Johnson owns 200 shares of Newmont Labs, Inc., which he bought for $15 per share. He is in a 33 percent tax bracket. It is the first week in December, and he has already received the full cash dividend for the year of $1.60 per share. The stock is currently selling for $25.50. He has decided to sell the stock and after paying broker commissions, his net proceeds will be $25 per share. His tax rate on capital gains is 20 percent.
a. How much in total taxes will Max pay this year for his investment in Newmont Labs, Inc.? Consider dividend income as well as capital gains.
b. Discuss the advantages of the capital gains tax over the tax on dividends.