Comparing after-tax returns to
pretax returns can also be eye-opening.
This article examines the historical trend in community bank returns on equity (ROE) over the last 10 years and highlights the gap between current and historical
pretax returns.
Researchers in both public finance and financial economics have studied whether tax rules have a pronounced effect on asset pricing and the
pretax returns on various financial assets.
For this reason, I model the after-tax returns and discuss the expected ordering of
pretax returns for each of these three potential investors.
Brennan's (1970) model of these tax effects indicates that risk-adjusted
pretax returns should be positively correlated to dividend yields.
The result is that an investor's aftertax returns can be significantly lower than the fund's advertised
pretax returns.
Lyon advocates reducing or eliminating tax preferences that do not produce social returns in excess of their
pretax returns as the most direct alternative to the corporate AMT for improving efficiency.
long-term capital gains, after-tax returns compared to
pretax returns, unrealized gain in a mutual fund, and the use of tax lot accounting to minimize capital gains distributions (see below).
As Figure 2 shows, production businesses can deliver from 45 percent to 135 percent
pretax returns on equity, depending upon the leverage ratio of the company and the all-in cost of production.
Planning suggestion: Corporations subject to the AMT may want to encourage dividend-paying companies in which they own 20% or more of the outstanding shares to sell their tax-exempt securities and invest in fully taxable securities that produce higher
pretax returns.
The Garland results found that the typical investor received only 41% of the preexpense,
pretax returns of the index.
