Use the following information to answer the question(s)below.
-The effective dividend tax rate in 1999 is closest to:
A)0%.
B)20%.
C)25%.
D)30%.

Question

Use the following information to answer the question(s)below. 
-The effective dividend tax rate in 1999 is closest to:
A)0%. 
B)20%. 
C)25%. 
D)30%.

Quizplus · Accepted Answer

The effective dividend tax rate is the rate at which dividends are taxed after considering the tax credit for dividends. In 1999, the tax credit for dividends was 1/3 of the grossed-up dividend amount. Therefore, if the grossed-up dividend rate was 6%, the dividend tax rate would be 2% (1/3 of 6%). This means that the effective dividend tax rate in 1999 would be 1 - 0.02 = 0.98 or 98%. To convert this to a percentage, we subtract it from 100%: 100% - 98% = 2%. Therefore, the effective dividend tax rate in 1999 is closest to 2/3 of the marginal tax rate, which is 25%. Choice C is the closest to this answer.

Use the Following Information to Answer the Question(s)below