Answer: 49%

## Explanation In a split-rate tax system, the effective tax rate on distributed earnings can be calculated using the formula: **Effective Tax Rate = Corporate Tax Rate on Dividends + (1 - Corporate Tax Rate on Dividends) × Shareholder Tax Rate on Dividends** Given: - Corporate tax rate on earnings allocated to dividends = 15% - Marginal shareholder tax rate on dividends = 40% **Calculation:** - First, the corporate tax is applied: 15% of pretax income - The remaining amount after corporate tax: 100% - 15% = 85% - Then the shareholder tax is applied to the dividend: 40% × 85% = 34% - Total tax burden: 15% + 34% = 49% **Alternative calculation:** Effective Tax Rate = 15% + (1 - 15%) × 40% = 15% + 85% × 40% = 15% + 34% = 49% Therefore, the effective tax rate on pretax income distributed as dividends is **49%**. **Why not the other options:** - **40%**: This is only the shareholder tax rate, ignoring the corporate tax component - **58%**: This would be too high and doesn't match the calculation The corporate tax rate on retained earnings (30%) is not relevant here since we're assuming a 100% payout ratio, meaning all earnings are distributed as dividends.

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