Following the 1986 Tax Act, the corporate tax rate of 34% was set above the personal tax rate of 28% on ordinary income, and 100% of realized capital gains became taxable at investors’ ordinary rates....

Following the 1986 Tax Act, the corporate tax rate of 34% was set above the personal tax rate of 28% on ordinary income, and 100% of realized capital gains became taxable at investors’ ordinary rates. What are the required before-tax rates of return (that is, the cost of equity capital) to corporations and to partnerships if investors require that the after-tax rate of return on investments of similar risk be equal to 15% per year and the typical shareholder holds shares for 8 years? Under what circumstances might we see both a corporation and a partnership producing the same goods and services in light of these required before-tax rates of return?