Jurisdiction B levies a flat 7 percent tax on the first $5 million of annual corporate income. Required: Jersey Inc. generated $

Question

3 years ago

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Jurisdiction B levies a flat 7 percent tax on the first $5 million of annual corporate income. Required: Jersey Inc. generated $

3.9 million income this year. Compute Jersey’s income tax and determine its average and marginal tax rate on total income. Leray Inc. generated $9.6 million income this year. Compute Leray’s income tax and determine Leray’s average and marginal tax rate on total income. What type of rate structure does Jurisdiction B use for its corporate income tax?

Business

1 answer:

Pie · Answer 1 · 2022-02-18T06:07:28+03:00

Answer:

a. Jersey Inc. generated $3.9 million income this year.

Income tax

= 3.9 million * 7%

= $273,000

The Average tax rate

= Tax/ Income

= 273,000/3.9 million

= 7%

<em>Marginal tax is the additional tax per dollar. As this is less than the $5 million threshold, it is 7%</em>

b. Leray Inc. generated $9.6 million income this year.

Income tax

= 5 million * 7%

= $350,000

The Average tax rate

= Tax/ Income

= 350,000/9.6 million

= 3.6%

Marginal tax is the additional tax per dollar. As this is more than the $5 million threshold, and they do not have to pay any more tax, the Marginal rate is 0%.

c. What type of rate structure does Jurisdiction B use for its corporate income tax?

<u>Regressive Rate structure</u>

In this regime, the average tax decreases as the income earned increases. Looking at Leray Inc, this appears to be the case so this is a Regressive Rate Structure.