Q. Which one of the following correctly defines the term ‘tax drag’?

[A] The reduction in an investors net returns caused by taxation on profits, dividends, or interest income.

[B] The impact of government subsidies in reducing the overall tax liability of a company.

[C] A situation where high tax rates result in increased economic activity and higher revenue collection.

[D] The total amount of taxes saved due to tax exemptions or deductions under specific government schemes.

Answer: A
Notes:

Explanations – Tax drag refers to the reduction in an investor’s net returns due to the taxes imposed on profits, dividends, or interest income. When an investment generates income, such as interest from fixed deposits or dividends from stocks, taxes are levied on this income. These taxes effectively lower the overall returns that the investor receives compared to what would have been earned without taxation. This reduction in returns due to taxation is termed as tax drag.

Source: The Hindu

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