Suppose a firm faces a current tax rate of 35% but expects this rate to fall to 20% in the future. Employees on average face a current marginal tax rate of 31% but expect this rate to fall to 20% when they retire in 15 years. The firm can earn 12% pretax on its pension investments and 10% after tax on corporate account. Employees on average can earn 10% after tax on their investments.
A. Which among salary, pension, and deferred compensation is tax preferred?
B. Explain your results.