A persons savings earn an effective rate i12 on which 45 inc

A person\'s savings earn an effective rate i=.12 on which 45% income tax is paid. If the inflation rate is 10% per year, what is the annual after-tax real rate of return?

Solution

After tax real rate of return = ( (1+post tax returns) / (1+inflation rate) - 1)

Here effective rate=0.12
Income tax rate= 0.45
Inflation rate= 0.10

Post tax returns = 0.12*(1-0.45)=0.066
After tax real rate of return = (1+0.066)/(1+0.1)-1= -0.0309
Thus after tax real rate of return is (3.09%) loss