Question

A firm's average tax rate is based on the total tax due divided by the taxable income. This rate is normally greater than the firm's marginal tax rate. true or false

Answer 1

FALSE--- it is the other-way round as explained below:

Average tax rate is the tax rate burden % on the payer(ie. Tax expense/Total income), just like net income margin on sales. Here, the total income may include tax-exempted incomes as also the non-tax-deductible expenses.It is a postmortem of taxes paid & it is arrived at after providing for basic & other exemptions

Whereas

Marginal tax rate is the % of tax that is entailed on every $ of additional income.,ie.incremental tax on incremental income--- which may always be above the exemption slab, where that income falls or fits in.It is the more relevant rate for financial decision-making of teh assessee.

So, average tax rate is almost always less than the marginal tax rate.