Let us assume, as was true of wealthy individuals in the United States in the 1960s, that the personal tax rate is 70% and that realized capital gains are taxed at half the top personal tax rate— that is, tcg = 35%. Assume that the top corporate rate is 48%. The before tax rate of return on investments is 15%. You are asked to advise a doctor as to whether she should incorporate. What would be the tax advantageous strategy for 5 year, 10 year, and 15 year investment horizons? Suppose that she did incorporate and that 5 years later the personal tax rate falls unexpectedly to 50%. Should she then liquidate her corporation and start a new partnership?
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