At the beginning of the year, Mr. L put $50,000 cash into an investment. At the

Question

At the beginning of the year, Mr. L put $50,000 cash into an investment. At the end of the year, he received a check for $5,000, representing his annual return on the investment. Mr L's marginal tax rate on ordinary income is 28%, However, his return on this particular investment is a capital gain taxed at 15%.
At the beginning of the year, Mr. L could have invested his $50,000 in a business with a 12% annual return. However this return would have been ordinary income rather then capital gain.
Considering the fact that Mr. L could have invested in this business, how much implicit tax did he pay with respect to this investment described in the the preceding problem?

Explanation / Answer

if he choose to invest at 12%
the tax would be
return =50,000*12%
= $ 6000
this is taxed on ordinary rate so
TAX= $ 6,000*28%
TAX= $ 1,680

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