After-tax Return

An 8% pre-tax return taxed at 20% gives an after-tax return of:

1. A.1.6%This is the tax itself (8% x 0.20), not what the investor keeps. The after-tax return is the remaining four-fifths, so the multiplier is (1 - 0.20).
2. B.6.4%Correct - 8% x 0.80.
3. C.6.0%This subtracts two percentage points rather than 20% of the return. A 20% rate applied to an 8% return removes 1.6 points, not 2.
4. D.10%This moves in the wrong direction entirely; taxes cannot raise a return. The after-tax figure must always be below the 8% pre-tax return.

Why: 8% x (1 - 0.20) = 6.4%.

A 7% pre-tax return taxed at 20% gives an after-tax return of:

1. A.5.0%This subtracts the 20 as if it were two percentage points off the return rather than a rate applied to it. Tax takes a fifth of the 7%, which is 1.4 points, leaving 5.6%.
2. B.1.4%This is the tax itself, the portion surrendered rather than the portion kept. Subtract it from the 7% pre-tax return to get what the investor retains.
3. C.8.4%This multiplies by 1.20 instead of 0.80, adding the tax rather than removing it. An after-tax return can never exceed the pre-tax return it comes from.
4. D.5.6%Correct - 7% x 0.80.

Why: 7% x (1 - 0.20) = 5.6%.