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Sandra would like to organize LAB as either an LLC (taxed as a sole proprietorship) or a C corporation. In either form, the entity is expected to generate an 10 percent annual before-tax return on a $540,000 investment. Sandra's marginal income tax rate is 37 percent, and her tax rate on dividends and capital gains is 23.8 percent (including the 3.8 percent net investment income tax). If Sandra organizes LAB as an LLC, she will be required to pay an additional 2.9 percent for self-employment tax and an additional 0.9 percent for the additional Medicare tax. LAB's income is not qualified business income (QBI) so Sandra is not allowed to claim the QBI deduction. Assume that LAB will distribute all of its after-tax earnings every year as a dividend if it is formed as a C corporation.
Problem 1) How much cash after taxes would Sandra receive from her investment in the first year if LAB is organized as either an LLC or a C corporation?
Problem 2) What is the overall tax rate on LAB's income in the first year if LAB is organized as an LLC or as a C corporation?
Hubbard argues that the Fed can control the Fed funds rate, but the interest rate that is important for the economy is a longer-term real rate of interest. How much control does the Fed have over this longer real rate?
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