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  3. 6. a complicating feature of the tax code is that

6. A complicating feature of the tax code is that interest and dividends are taxed...

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Accounting

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6. A complicating feature of the tax code is that interest and dividends are taxed at a higher rate than capital gains for individuals. A lower capital gains tax rate reduces the desirability of investing in assets with high expected capital gains within a tax-eferred account. The reason is that in a tax-deferred account investment earnings are taxed at the ordinary income tax rate even if some of the earnings are from capital gains. Thus, when decid-ing to save through an account with tax- deferred earnings, one must compare the advantage of deferring tax versus the disad- vantage of potentially paying a higher tax rate on some of the earnings. To illustrate, suppose that Travis is going to retire in 10 years, the annual before-tax rate of return is 10 percent, one-half of this return is from capital gains, his income tax rate is 30 percent, and his cap- ital gains tax rate is 20 percent. Will Travis have more money at retirement by saving $1,000 of before-tax wages in a qualified ac- count or will he have more money by saving in an account with no tax benefits

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