I'm trying to reconcile two computations concerning the difference in ending balance of two investments. Each returns only a 2% dividend yield that is taxed either annually (investment A) or all once at the end of 3 compound periods (investment B). I'm trying to measure the loss of growth on A's annual tax bill. The table below shows A. It can also be calculated as 105.187=1.017^3, where 1.7 is the dividend after paying the 15% tax.
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SOY EOY GAIN TAX BASIS periods Compounded tax 100.000 102.000 2.000 0.300 101.700 3 0.018 101.700 103.734 2.034 0.305 103.429 2 0.012 103.429 105.497 2.069 0.310 105.187 1 0.006 0.037
I would think that the difference would be attributed to the loss of growth on the annual tax bill of investment A. To prove this to myself, I broke out the tax bill and compounded it at the full 2%. So, the 0.30 tax in year one would grow to 0.18= .30 - (.30 x (1.02^3)). These total 0.37 (last column), not the expected 0.15.
I'm either thinking about this wrong or I've got a timing issue. Any insight?
Many thanks for any insight!