Determine the effective dividend tax rate for a buy and hold

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Reference no: EM132018061

Suppose you are a rational investor and looking at the following tax rates:

Year	Capital Gains Rate	Ordinary Income Rate	Dividend Rate
1997-2000	20%	40%	40%
2001-2002	20%	39%	39%
2003-	15%	35%	15%

The current tax rates are set to expire in 2008 unless Congress extends them. The tax rates shown are for financial assets held for one year.

For assets held less than one year, capital gains are taxed at the ordinary income tax rate (currently 35% for the highest bracket); the same is true for dividends if the assets are held for less than 61 days.

What is the effective dividend tax rate for a buy and hold individual investor in 2006 ? Please show all work.

Reference no: EM132018061

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