Work out and explain the effective tax rate borne by each currency unit a company earns, under double-taxation, imputation and split-rate tax regimes
The idea
The effective rate is the total tax on one unit of pre-tax corporate earnings paid out as a dividend. Under double taxation it is the corporate rate plus (1 − corporate rate) × the individual dividend rate, so 25% and 20% give 0.25 + 0.75 × 0.20 = 40%. A split-rate system uses the same formula but with the lower corporate rate that applies to distributed earnings. Under full imputation the shareholder is credited for the corporate tax paid, so the effective rate is simply her own marginal rate. She pays or is refunded the difference. The traps are adding the rates, using the retained-earnings rate under split-rate, and forgetting the imputation credit.
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