Question: Assume you are a tax planner for a client with the following concerns
a. Suppose there exist three riskless assets. The first yields a fully taxable return of 7% before tax; the second yields a pretax return of 6%, only half of which is taxable; and the third yields a 5% fully tax-exempt return. Over what range of tax rates does each asset yield the highest after-tax return? How does this relate to tax clienteles?
b. Suppose the tax-rate schedule is as follows: 20% on the first $5,000 of investment income, 30% on the next $5,000 of investment income, and 40% on investment income exceeding $10,000. If you had $150,000 to invest and you had to invest in only one of the three assets, which one would maximize after-tax income?
c. Can you beat the investment strategy in (b) by investing in a portfolio of assets? What is the optimal investment (the one that maximizes after-tax income) over the range of investment from $0 to $500,000?