If half the interest earned on the savings portion of an insurance policy were taxable, would it still be possible for taxpayers to eliminate their taxable income, in the absence of tax rule restrictions and market frictions? Illustrate your answer to this question by assuming that the taxpayer’s taxable income before arbitrage strategies is $ 100,000 and the before tax interest rate is 10%.
Answer to relevant QuestionsSuppose that insurance policies were fully tax exempt but (a) policies pay less than the fully taxable bond return to cover the costs of the insurance company and (b) loans can be secured only at a higher rate than the fully ...Assume you face a progressive tax rate system. Show that it does not pay for you to reduce your explicit tax rate on fully taxable income to below the implicit tax rate on tax exempt securities. Under what conditions would ...If managers are compensated, in part, on the basis of a bonus based on accounting earnings, they are likely to object to any tax plans that reduce reported earnings. What actions could the firm take to mitigate this concern? How do hidden information problems affect the costs of corporate restructuring? Might the tax benefits of such restructurings be sacrificed by corporations because of these problems? Assume Sonics Inc., from the prior exercise, uses LIFO with the periodic inventory system. Thus the LIFO cost of ending inventory at year 1 of 150 units is $ 1,600 (100 @ $ 10 + 50 @ $ 12). Suppose in year 2, Sonics reports ...
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