Response to the following problem:
For the current year, Creative Designs Inc., a C corporation, reports taxable income of $300,000 before paying salary to Ben the sole shareholder of Creative Designs, Inc. (CD). Bens marginal tax rate on ordinary income is 28% and 15% on dividend income. Assume CDs tax rate is 39%.
a) How much total income tax will Creative Designs and Ben pay on the $300,000 taxable income for the year if CD doesnt pay any salary to Ben and instead distributes all of its after-tax income to Ben as a dividend?
b) How much total income tax will Creative Designs and Ben pay on the $300,000 of income if CD pays Ben a salary of $100,000 and distributes its remaining after-tax earnings to Ben as a dividend?
c) Why is the answer to part b lower than the answer to part a?