Some economists argue that income taxes reduce the incentive to save. For exampl

Question

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)

Explanation / Answer

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%

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