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Answer: 49%.
## Explanation In a split-rate tax system, the effective tax rate on distributed earnings is calculated as: **Effective Tax Rate = Corporate Tax Rate on Dividends + (1 - Corporate Tax Rate on Dividends) × Shareholder Tax Rate on Dividends** Given: - Corporate tax rate on dividends: 15% - Shareholder tax rate on dividends: 40% Calculation: - Corporate tax paid: 15% of pretax income - After corporate tax: 85% of pretax income remains - Shareholder tax: 40% × 85% = 34% of pretax income - **Total effective tax rate = 15% + 34% = 49%** Therefore, the effective tax rate on pretax income distributed as dividends is 49%.
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An analyst gathers the following information about income tax rates in a jurisdiction with a split-rate tax system:
Assuming a payout ratio of 100%, the effective tax rate on pretax income distributed in dividends is:
A
40%.
B
49%.
C
58%.