a. Calculate the tax disadvantage to organizing a U.S. business today as a corporation, as compared to 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 tax rate on corporate profits is 35 percent (Tc = 0.35), the average personal tax rate for the partners is also 35 percent (Tp = 0.35), and the capital gains tax rate on dividend income is 15 percent (Tdiv = 0.15).
b. Now 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).