The United States switched from the progressive tax system to a flat tax system, effective from...
The United States switched from the progressive tax system to a flat tax system, effective from January 1, 2018. This had led to a significant impact on the profitability of many corporate organizations. By switching to the new tax system, will the tax depreciation of assets affect a firm's net income? You may explain with an example.
Homework Answers
The switch from a progressive tax system to a flat tax system is definitely going to impact the net income of a firm.
For example, in a progressive tax system, the depreciation tax shield applies at the highest marginal rate. However in the case of a flat tax system, the depreciation tax shield is also flat.
As an example, the below illustration explains
| Progressive system | |||||||
| Tax system: | EBIDTA | 12000 | |||||
| Depreciation | 500 | ||||||
| PBT | 11500 | ||||||
| PBT | Tax | Tax on EBIDTA | Tax on PBT | ||||
| <2000 | Nil | 0 | 0 | ||||
| 2000-5000 | 10% | 300 | 300 | ||||
| 5000-10000 | 300+20%*income exceeding 5000 | 1000 | 1000 | ||||
| > 10000 | 1300 + 30%*income exceeding 10000 | 600 | 450 | Avg tax rate | 15.22% | ||
| 1900 | 1750 | ||||||
| So total tax shield due to depreciation | 150 | (Dep value * highest tax rate) | |||||
| Flat system | |||||||
| Tax system: | EBIDTA | 12000 | |||||
| Depreciation | 500 | ||||||
| PBT | 11500 | ||||||
| Tax rate | 18% flat | Tax on EBIDTA | Tax on PBT | ||||
| 2160 | 2070 | ||||||
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EBIT
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Operating costs (excluding
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EBITDA..............................................................
Depreciation.......................................................
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Interest
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