Suppose a Miller equilibrium exists with a corporate tax rate of 30% and a personal tax rate on income from bonds of 35%. What is the personal tax rate on income from stocks?
A) 0.0%
B) 7.1%
C) 10.05%
D) 45.5%
E) None of these.

Question

Quizplus · Accepted Answer

In a Miller equilibrium, the after-tax return on bonds equals the after-tax return on stocks. The formula is (1 - corporate tax rate) * (1 - personal tax rate on stocks) = (1 - personal tax rate on bonds). Solving for the personal tax rate on stocks gives 7.1%.

Suppose a Miller Equilibrium Exists with a Corporate Tax Rate