Chapter 2, Problem 25QP

a)

Summary Introduction

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 firm. 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)

Summary Introduction

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: The average tax rate refers to the total tax bill divided by the total taxable income.

c)

Summary Introduction

To determine: The new tax bubble, if the threshold of 39 percent tax bracket is reduced from $335,000 to $200,000

Introduction:

Tax bubble refers to the rise in the marginal tax rate in order to match with 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 rates of 34 percent and 35 percent, respectively.