The Window Corporation had income before taxes of $1 million. Window paid taxes at a flat rate of 35% and paid 30 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 Window, considering both corporate and individual taxation, is closest to:

Question

Quizplus · Accepted Answer

The corporate tax is 35%, leaving $650,000 after taxes. Dividends are 30% of $650,000, which is $195,000. Shareholders pay 15% tax on dividends, which is $29,250. Total taxes are $350,000 (corporate) + $29,250 (individual) = $379,250. The effective tax rate is $379,250 / $1,000,000 = 37.925%.

The Window Corporation Had Income Before Taxes of $1 Million