Corporate Tax Rates dollar. The percentage tax rates shown in Table 2.3 are all marginal rates. Put another way, the tax rates in Table 2.3 apply to the part of income in the indicated range only, not all income.

The difference between average and marginal tax rates can best be illustrated with a simple example. Suppose our corporation has a taxable income of $200,000. What is the tax bill? Using Table 2.3, we can figure our tax bill as:

.15($ 50,000) .25($ 75,000 -.34($100,000 -.39($200,000 -

= $ 7,500 50,000) = 6,250 75,000) = 8,500 100,000) = 39,000 $61,250

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Our total tax is thus $61,250.

In our example, what is the average tax rate? We had a taxable income of $200,000 and a tax bill of $61,250, so the average tax rate is $61,250/200,000 = 30.625%. What is the marginal tax rate? If we made one more dollar, the tax on that dollar would be 39 cents, so our marginal rate is 39 percent.

Deep in the Heart of Taxes

Algernon, Inc., has a taxable income of $85,000. What is its tax bill? What is its average tax rate? Its marginal tax rate?

From Table 2.3, we see that the tax rate applied to the first $50,000 is 15 percent; the rate applied to the next $25,000 is 25 percent, and the rate applied after that up to $100,000 is 34 percent. So Algernon must pay .15 x $50,000 + .25 x 25,000 + .34 x (85,000 -75,000) = $17,150. The average tax rate is thus $17,150/85,000 = 20.18%. The marginal rate is 34 percent because Algernon's taxes would rise by 34 cents if it had another dollar in taxable income.

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Taming Taxes

Taming Taxes

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