Explore BrainMass
Share

# Marginal Tax Rate Estimated

Suppose a firm I equally likely to earn \$2 million this year or lose \$3 million. The firm faces a tax rate of 40% on each dollar of taxable income, and the firm pays no taxes on losses. In this simple one-period scenario, ignore the carryback and carry forward rules. The firm's expected taxable income is thus a loss of \$500,000 calculated as .50(- \$3) + .50(\$2). What is the firm's expected marginal rate?

Suppose a second firm is equally likely to earn \$3million this year or lose \$2 million. This firm also faces a tax rate of 40% on each dollar of taxable income (and the firm pays no taxes on losses0. Again in this simple one-period scenario, ignore the carryback and carry forward rules. The firm's expected taxable income is thus a profit of \$500,000 calculated as .50(\$3) + .50(-\$2).
- What is the firm's expected marginal tax rate.
- Why is the first firm's marginal tax rate not 0%?
- Why is the second firm's marginal tax rate not 40%?

© BrainMass Inc. brainmass.com June 19, 2018, 3:05 am ad1c9bdddf

#### Solution Preview

=>
For firm 1, expected profit = 0.5(-3)+0.5*(2) = -1.5+1 = -\$0.5 million

For every change of \$1 million profit, net change in tax liability = (-0.5+1.0)*0.4 = \$0.2 ...

#### Solution Summary

Expected marginal tax rate estimated in two scenarios.

\$2.19