
a)
To critically think about: The reason why the tax rate rises to 39 percent from 34 percent when the taxable income is $100,001 and falls to 34 percent when the income is 335,001.
Introduction:
Income tax refers to the charge levied by the government on the income of the company. The company has a legal obligation to pay taxes. The tax rate differs based on the income of the company. The tax rate is as follows:
Taxable income | Tax rate |
$0 to $50,000 | 15% |
$50,001 to $75,000 | 25% |
$75,001 to $100,000 | 34% |
$100,001 to $335,000 | 39% |
$335,001 to $10,000,000 | 34% |
$10,000,001 to $15,000,000 | 35% |
$15,000,001 to $18,333,333 | 38% |
$18,333,334 and above | 35% |
b)
To compute: The average tax rate when the taxable income is $335,001 and $18,333,334 and to confirm the answer in Part (a).
Introduction:
Income tax refers to the charge levied by the government on the income of the company. The company has a legal obligation to pay taxes. The tax rate differs based on the income of the company. The tax rate is as follows:
Taxable income | Tax rate |
$0 to $50,000 | 15% |
$50,001 to $75,000 | 25% |
$75,001 to $100,000 | 34% |
$100,001 to $335,000 | 39% |
$335,001 to $10,000,000 | 34% |
$10,000,001 to $15,000,000 | 35% |
$15,000,001 to $18,333,333 | 38% |
$18,333,334 and above | 35% |
The average tax rate refers to the total tax bill divided by the total taxable income.
c)
To determine: The new tax bubble, if the threshold of 39 percent tax bracket is reduced from $335,000 to $200,000.
Introduction:
Income tax refers to the charge levied by the government on the income of the company. The company has a legal obligation to pay taxes. The tax rate differs based on the income of the company. The tax rate is as follows:
Taxable income | Tax rate |
$0 to $50,000 | 15% |
$50,001 to $75,000 | 25% |
$75,001 to $100,000 | 34% |
$100,001 to $335,000 | 39% |
$335,001 to $10,000,000 | 34% |
$10,000,001 to $15,000,000 | 35% |
$15,000,001 to $18,333,333 | 38% |
$18,333,334 and above | 35% |
Tax bubble refers to the rise in the marginal tax rate in order to match the average tax rate. The 38 percent tax bracket and the 39 percent tax bracket are tax bubbles because they help to maintain the average tax rate of 34 percent and 35 percent respectively.

Want to see the full answer?
Check out a sample textbook solution
Chapter 2 Solutions
Fundamentals of Corporate Finance
- EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENTIntermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage Learning

