Assume that the corporate tax rate is 34% and the personal tax rate is 30%. The

Question

Assume that the corporate tax rate is 34% and the personal tax rate is 30%. The founders of a newly formed business are debating between setting up the firm as a partnership versus a corporation. The firm will not need to retain any earnings, so all of its after-tax income will be paid out to its investors, who will have to pay personal taxes on whatever they receive. What is the difference in the percentage of the firm's pre-tax income that investors actually receive and can spend under the corporate and partnership forms of organization?

Explanation / Answer

The taxes paid in partnership = 30%
The taxes paid in corporation = 34% + 0.66 * 30% = 53.8%
The difference =53.8% - 30% = 23.8%

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