Exercise 2 Chapter 2. Suppose a taxpayer invests $100,000 in a partnership. the

Question

Exercise 2 Chapter 2.

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?

Explanation / Answer

a. What is the pretax rate of return to the taxpayer? = 50000/100000 = 50% answer b. What is the after-tax rate of return to the taxpayer? - 50000*72% = 36000/100000 = 36% answer

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