Following the 1986 Tax Act, the corporate tax rate of 34% was set above the personal tax rate of 28% on ordinary income, and 100% of realized capital gains became taxable at investors’ ordinary rates. What are the required before tax rates of return (that is, the cost of equity capital) to corporations and to partnerships if investors require that the after tax rate of return on investments of similar risk be equal to 15% per year and the typical shareholder holds shares for 8 years? Under what circumstances might we see both a corporation and a partnership producing the same goods and services in light of these required before tax rates of return?
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