Corporation Growth has $79,000 in taxable income, and Corporation Income has $7,
ID: 2737602 • Letter: C
Question
Corporation Growth has $79,000 in taxable income, and Corporation Income has $7,900,000 in taxable income. Use the tax rates from Table 2.3. (Do not round intermediate calculations.)
Suppose both firms have identified a new project that will increase taxable income by $13,000. How much in additional taxes will each firm pay?
Corporation Growth has $79,000 in taxable income, and Corporation Income has $7,900,000 in taxable income. Use the tax rates from Table 2.3. (Do not round intermediate calculations.)
Explanation / Answer
Answer:a Using Table 2.3, we can see the marginal tax schedule.
For Corporation Growth, the first $50,000 of income is taxed at 15 percent, the next $25,000 is taxed at 25 percent, and the next $4,000 is taxed at 34 percent. So, the total taxes for the company will be:
Taxes Growth = 0.15($50,000) + 0.25($25,000) + 0.34($4,000)
Taxes Growth = $15,110
For Corporation Income, the first $50,000 of income is taxed at 15 percent, the next $25,000 is taxed at 25 percent, the next $25,000 is taxed at 34 percent, the next $235,000 is taxed at 39 percent, and the next $7,565,000 is taxed at 34 percent. So, the total taxes for the company will be:
Taxes Income = 0.15($50,000) + 0.25($25,000) + 0.34($25,000) + 0.39($235,000) + 0.34($7,565,000)
Taxes Income = $2,686,000
Answer: b. The marginal tax rate is the tax rate on the next $1 of earnings. Each firm has a marginal tax rate of 34% on the next $13,000 of taxable income, despite their different average tax rates, so both firms will pay an additional $4,420 in taxes.