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Detailed Instructions on the Calculation of Capital Gain

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Suppose that, in an effort to reduce the federal deficit, Congress increases the top personal tax rate on interest and dividends to 35% but retains a 15% tax rate on realized capital gains. The corporate tax rate stays at 35%. Compute the total corporate plus personal taxes paid on debt versus equity income if:

(a) capital gains are realized immediately and

(b) capital gains are deferred forever. Assume capital gains are half of equity income.

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This solution provides detailed instructions to calculate capital gain.

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