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Question

Marginal versus Average Tax Rates (Refer to Table 2.3.) Corporation Growth has $82,500 in taxable income, and Corporation Income has $8,250,000 in taxable income.What is the tax bill for each firm?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?

Solution Preview

Explanation:

Compute the tax bill of Corporation G:

The taxable income of $82,500 of Corporation G falls under three tax brackets. They are 15 percent, 25 percent, and 34 percent. Hence, the income tax of Corporation G is as follows:

Taxable income

Tax calculation

Income tax

$50,000

$50,000×15%

$7,500

$25,000 ($75,000−$50,000)

$25,000×25%

$6,250

$7,500 ($82,500−$75,000)

$7,500×34%

$2,550

Total income tax

 

$16,300

Hence, the tax bill of Corporation G is $16,300.

b)

Explanation:

Compute the tax bill of Corporation G after the increase in income:

The taxable income of $92,500 of Corporation G falls under three tax brackets. They are 15 percent, 25 percent, and 34 percent. Hence, the income tax of Corporation G is as follows:

Taxable income

Tax calculation

Income tax

$50,000

$50,000×15%

$7,500

$25,000 ($75,000−$50,000)

$25,000×25%

$6,250

$17,500 ($92,500−$75,000)

$17500×34%

$5,950

Total income tax

 

$19,700

Hence, the tax bill of Corporation G is $19,700.

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