Question

Refer to the corporate marginal tax rate information in Table 2.3 . b-1 Compute the average tax rate for a corporation with exactly $335,001 in taxable income. (Do not round intermediate calculations. Enter your answer as a percent rounded to the nearest whole number, e.g., 32.) Average tax rate % b-2 What is the average tax rate for a corporation with exactly $18,333,334? (Do not round intermediate calculations. Enter your answer as a percent rounded to the nearest whole number, e.g., 32.) Average tax rate % c. The 39 percent and 38 percent tax rates both represent what is called a tax “bubble.” Suppose the government wanted to lower the upper threshold of the 39 percent marginal tax bracket from $335,000 to $198,000. What would the new 39 percent bubble rate have to be? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Bubble rate

Answer 1

b-1.     Taxes = 0.15($50,000) + 0.25($25,000) + 0.34($25,000) + 0.39($235,000) = $113,900

Average tax rate = $113,900 / $335,000 = 34%

b-2.     Taxes = 0.15($50,000) + 0.25($25,000) + 0.34($25,000) + 0.39($235,000) + 0.34($9,665,000) + 0.35($5,000,000) + 0.38($3,333,334) = $6,416,667

Average tax rate = $6,416,667 / $18,333,334 = 35%

C      We want the average tax rates and the marginal tax rates to be the same (34%) at the taxable income of $198,000.

In other words, Taxes = 0.34($198,000) = $67,320

$67,320 = 0.15($50,000) + 0.25($25,000) + 0.34($25,000) + X($98,000)

$67,320 = $7,500 + $6,250 + $8,500 + X($98,000)

$67,320 = $22,250 + X($98,000)

$67,320 - $22,250 = X($98,000)

X($98,000) = $45,070

X = $45,070 / $98,000 = 45.99%

So, the marginal tax rate has to be 45.99% for the incomes above $198,000

the new 39 percent bubble rate have to be 45.99%