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 the above

Question

Quizplus · Accepted Answer

In a Miller equilibrium, the after-tax return on bonds equals the after-tax return on stocks. Using the formula (1 - Tc)(1 - Ts) = (1 - Tb), where Tc is the corporate tax rate, Ts is the personal tax rate on stocks, and Tb is the personal tax rate on bonds, we can solve for Ts: (1 - 0.30)(1 - Ts) = (1 - 0.35). Solving gives Ts = 0.071 or 7.1%.

Suppose a Miller Equilibrium Exists with a Corporate Tax Rate