Calculate the tax disadvantage to organizing a U.S. business today as a corporation, as a 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 be $500,000 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 gain tax rate on dividend income is 15% (Tdiv=0.15).
Now recalculate the tax disadvantage using the same income but with the maximum tax rates that existed before 2003. (These rates were 35% (Tc=0.35) on corporate profits and 38.6 % (Tp=.386) on personal investment income.)