Suppose a taxpayer invests $ 100,000 in a partnership. The taxpayer faces a personal tax rate of 70% and a tax rate on capital gains of 28%. In the first year, the partnership spends the entire $ 100,000 on research, which the taxpayer can claim as a deduction against her other income. In the second year, the partnership sells the developed technology, and the taxpayer’s share of the sale price is $ 50,000, which is taxed as a capital gain. (Ignore the time value of money in your answer.)
a. What is the pretax rate of return to the taxpayer?
b. What is the after tax rate of return to the taxpayer?