Originally posted by MrFun
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W= wage income
T= tax rate
r= return
C= investment tax rate
Wage and return income with no taxes:
W + W*(r)
Add taxes on wages:
(1-T)W + (1-T)(W)(r)
Add taxes on investment income:
(1-T)W + (1-T)(W)(r) - (1-T)(W)(r)(C)
so...
(1-T)W + (1-T)(W)(r)(1-C)
As you can see, the investment income is not only taxed at the investment tax rate but also implicitly taxed at the wage tax rate.
And yet, someone with more investment income will have a lower ETR but will actually have been more constrained by taxation!
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