Some economists argue that income taxes reduce the incentive

Some economists argue that income taxes reduce the incentive to save. For example, suppose Jessica has earned $10,000 that she is considering investing in a bank certificate of deposit (CD) paying a 3 percent rate of return. If the income tax rate is 30 percent, then after paying income taxes, Jessica will have $7,000 from her earnings remaining to invest. (Enter a numeric response using an integer Furthermore, after paying taxes on the interest she earns, Jessica\'s after-tax rate ofreturn on her savings will be 2.10 percent. (Enter a numeric response using a real number rounded to two decimal places)

Solution

The investment earns a pre-tax return rate of 3%.

So, post-tax rate of return = Pre-tax return x (1 - Tax rate)

= 3% x (1 - 0.3)

= 3% x 0.7

= 2.1%