Question: A taxpayer is considering two mutually exclusive alternatives Alternative A
A taxpayer is considering two mutually exclusive alternatives. Alternative A is to hire a tax accountant at a cost of $ 20,000 to research the tax law on a tax avoidance plan. If successful, the plan would save the taxpayer $ 21,000 in taxes. The probability of success is estimated to be 75%. Alternative B is to hire a marketing firm at a cost of $ 18,000, whose task would be to develop a marketing plan for the taxpayer’s product. If successful, the plan would reduce other advertising costs by $ 25,000 without affecting sales revenue. The probability of success is estimated at 80%. Which alternative should the taxpayer choose if he or she faces a tax rate of 15%? Of 35%? Comment on your results. Is tax planning a tax favored activity? Is so, for whom?
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