The Bumble Bee Corporation had income before taxes of $1 million. Bumble Bee paid taxes at a flat rate of 30% and paid 40 percent of its earnings to its shareholders in the form of cash dividends. If its shareholders are taxed at the rate of 15 percent on dividend income, the effective tax rate on the income generated by Bumble Bee, considering both corporate and individual taxation, is closest to:

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Quizplus · Accepted Answer

The corporate tax is 30%, so $300,000 is paid in taxes, leaving $700,000. 40% of $700,000 is paid as dividends, which is $280,000. Shareholders pay 15% tax on dividends, which is $42,000. Total taxes paid are $300,000 + $42,000 = $342,000. The effective tax rate is $342,000 / $1,000,000 = 34.2%.

The Bumble Bee Corporation Had Income Before Taxes of $1