Explain why reducing earnings volatility in a progressive tax environment can improve expected after-tax profit.

Explain why reducing earnings volatility in a progressive tax environment can improve expected after-tax profit.

Expert Solution

As we know earning volatility means unstable earning or income and profit after tax is earnings of a business or corporate after paying all the taxes and expenses.

As income inequality is increasing over the past many years it leads to business cycle fluctuations as well as the tax rates. High income people pays more taxes than the low income people. A progressive tax system would reduce income inequality if nothing else changes. Profit after tax means Profit before tax subtracted by the Tax rate. If the income of all high income and low income people will be stable then the after tax margin will be improved as well.

Profit after tax margin is watched by investors very closely to see that is company income generating ability is changing over time or not. As stable the income, improvisation in the after tax profit margin which means higher will be the efficiency, value in forms of profits. It will be good for the economy as well as business also. so thats why reducing earnings volatility in a progessive tax environment will definately improve the expected after tax profit.

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