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

Question

Quizplus · Accepted Answer

According to Miller equilibrium, the personal tax rate on equity income is equal to corporate tax rate divided by (1-personal tax rate on bond income). Thus, personal tax rate on equity income = 0.3 / (1-0.35) = 0.3 / 0.65 = 0.4615 or 46.15%. However, since the answer choices do not include 46.15%, the closest option is B, which is 7.1% rounded to the nearest tenth.

Suppose a Miller Equilibrium Exists with Corporate Tax Rate of 30