A taxpayer may choose to accept a reduced market rate of return on an investment to take advantage of a tax preference associated with the investment. In such case, the taxpayer will pay a(n):

Question

Quizplus · Accepted Answer

When a taxpayer decides to accept a reduced market rate of return on an investment to take advantage of a tax preference associated with the investment, the difference between the expected market rate of return and the reduced rate of return accepted represents an implicit tax. This is because the taxpayer is effectively paying a tax by sacrificing potential earnings to reap the benefits of the tax preference.

A Taxpayer May Choose to Accept a Reduced Market Rate