CFA CFA Level 3 Individual Investors-Taxes

Individual Investors-Taxes

  • This topic has 7 replies, 4 voices, and was last updated Oct-17 by AjFinance.
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    • RaviVooda
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      Which of the following moves by a government would most likely lead to the government taking on more investment risk?

      A)Moving from a heavy dividend tax regime to a common progressive tax regime.

      B)Moving from a common progressive tax regime to a heavy dividend tax regime.

      C)Tax regimes cannot shift investment risk.

      The correct answer was B) Moving from a common progressive tax regime to a heavy dividend tax regime.
      Moving from a common progressive tax regime to a heavy dividend tax regime would increase the tax on dividends, which are taxed annually, and this would shift some of the investment risk to the government.

      Please help to explain why the answer is correct. I did not understand the solution

      @alta12
      , @AjFinance‌ ,@vincentt,@sophie

    • vincentt
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      I’ve not touch the questions in taxes yet, but I guess common progressive tax will have less investment risk because it’s progressive. The same amount of invested assets held by a low and high income earner will have different tax brackets. So the effective investment risk to the government varies. Also, if you held the investment forever, you will not get taxed. Also, remember how much tax you can save if you use a Tax-Deferred Account – paying capital gained tax at the end.

      As for dividend tax (which is paid upon receiving), it does not take your earning brackets into account, it’s a flat rate on the dividends that you received.

      Therefore, the effective tax value on dividend income to the government is higher.

    • RaviVooda
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      @vincentt‌ that helps. thanks

    • AjFinance
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      @RaviVooda In case of common progressive, some investors who fall in the lower tax brackets might be taxed less. However, when it comes to “Heavy Dividend Tax Regime”, all returns earned in the form of dividends are taxed heavily, so the government assumes a fair amount of investment risk. Just like @Vincentt mentioned above, it does not take into account the earning brackets.

    • RaviVooda
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      @vincent‌t, @AjFinance‌ Thanks guys

    • vincentt
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      no prob mate @RaviVooda

    • Alta12
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      @RaviVooda Just got this message. Yes, I agree with (B) for the reasons listed.

    • AjFinance
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      @RaviVooda No Probs dude

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