Calculate the tax disadvantage to organizing a U.S. business today, after passage of the Jobs and Growth Tax Relief Reconciliation Act of 2003, as a corporation versus 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 effective corporate profits tax rate is 35 percent
(Tc = 0.35); the average personal tax rate for the partners of the business is also 35 percent (Tp = 0.35); and the capital gains tax rate on dividend income is 15 percent (Tcg = 0.15).
Then, recalculate the tax disadvantage using the same income but with the maximum tax rates that existed before 2003. These rates were 35 percent (Tc = 0.35) on corporate profits and 38.6 percent (Tp = 0.386) on personal investment income.