Calculate the tax disadvantage to organizing a U.S. business as a corporation versus as 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 $3,000,000 per year under either organizational form. The tax rate on corporate profits is 30 percent (Tc = 0.30); the average personal tax rate for the partners is 35 percent (Tp = 0.35); and the capital gains tax rate on dividend income is 15 percent (Tdiv = 0.15). Then, recalculate the tax disadvantage using the same income but with the maximum tax rates that existed prior to 2003. (These rates were 35 percent (Tc = 0.35) on corporate profits and 38.6 percent (Tp = 0.386) on personal investment income.)
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