Taxes

Taxes can be one of the largest cash outflows that a firm experiences. For example, for the fiscal year 2001, Wal-Mart's earnings before taxes were about $9.1 billion. Its tax bill, including all taxes paid worldwide, was a whopping $3.5 billion, or about 38 percent of its pretax earnings. The size of the tax bill is determined through the tax code, an often amended set of rules. In this section, we examine corporate tax rates and how taxes are calculated.

If the various rules of taxation seem a little bizarre or convoluted to you, keep in mind that the tax code is the result of political, not economic, forces. As a result, there is no reason why it has to make economic sense.

average tax rate

Total taxes paid divided by total taxable income.

marginal tax rate

Amount of tax payable on the next dollar earned.

Taming Taxes

Taming Taxes

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