Suppose a taxpayer invests $100,000 in a partnership. The taxpayer faces a personal tax of 70% and a tax rate on capital gains of 28%. In this year, the partnership spends the entire $10,000 on research, which the taxpayer can claim as a deduction against her other income. In the second year, the partnership sells the developed technology, and the taxpayer’s share of the sale price is $50,000, which is taxed as a capital gain. (Ignore the time value of money in your answer).
a) What is the pretax rate of return to the taxpayer?
b) What is the after-tax of return to the taxpayer?