Question

18. Marginal versus Average Tax Rates (Refer to Table 2.3.) Corporation Growth has $82,000 it taxable income, and Corporation Income has $8,200,000 in taxable income. a. What is the tax bill for each firm? b. Suppose both firms have identified a new project that will increase taxable income by $10,000 How much in additional taxes will each firm pay? Why is this amount the same? XHX

Answer 1

a) A company has to pay tax on the income earned by it in previous year based on the slab rate applicable for the year. In the given problem, C G earned a taxable income of $82,000 for the year and on which it needs to pay tax as per the slab rate below:

Tax Rate Taxable Income S0- $50,000 15% 50,001 - $75,000 25% 75,001 $100,000 34% 100,001-$335,000 39% 335,001- $10,000,000 34% $10,000,001 - $15,000,000 35 % $15,000,001 - $18,333,333 38 % $18,333,331 35%

The tax to be paid by the company for the year is now calculated as under: Tax amount Calculation 15% on $ 50,000 $7,500 25% on $25,000 (S75,000 - S50,000) $6,250 34% on (S82,000 - $75,000) $2,380 Total $16,130 Therefore, the income tax to be paid by C G is $16,130

The Cl earned a taxable income of S 8,200,000 for the year, on which it needs to pay tax as per the slab rate above. be calculated as under: The tax to be paid by the company for the year cann Tax amount Calculation 15% on $ 50.000 $7,500 25% on $ 25,000 ($75,000 -S50,000) $6,250 34% on (S100,000 S75,000) $8,500 39% on (S335,000 $100,000) $91,650 34% on (S8,200,000 S335,000) $2,674,100 Total $2,788,000 Therefore, the income tax to be paid by Cl is $ 2,788,000

b. For C G, if the income increases by $10,000, the total taxable income of the firm would be $92,000 and the firm would still be in 34% bracket i.e. additional taxes on $10,000 income would be 34% at $3,400 Therefore, the additional taxed to be paid by the C G is $3,400.