# Question: Suppose the tax rate is 30 if taxable income is

Suppose the tax rate is 30% if taxable income is positive and 0% if taxable income is negative. Calculate the expected tax payable for the following four projects. For each project the expected taxable income is $ 50,000. For each project, also calculate the expected average tax rate (expected total taxes divided by expected taxable income). Explain and discuss your results.

a. Certain payoff $ 50,000

b. 50% chance of $ 100,000 and a 50% chance of $ 0

c. 50% chance of $ 200,000 and a 50% chance of a loss of $ 100,000

d. 50% chance of $ 500,000 and a 50% chance of loss of $ 400,000 This problem can be solved by preparing a graph similar to Figure 6.1.

Figure 6.1

1. Draw in the tax rate schedule for taxable income in the range $ 500,000 to +$ 500,000 with taxable income on the horizontal axis and tax payable on the vertical axis.

2. Mark the two endpoints on the tax schedule for each project. (For project 2 the two endpoints are $ 0 and $ 50,000.) Draw a straight line between the two outcomes.

3. Draw a vertical line upward from the horizontal axis at taxable income equal to $ 50,000.

4. Finally, read off the expected tax payable for each project where the expected tax payable is the intersection point of the lines in (2) and (3).

a. Certain payoff $ 50,000

b. 50% chance of $ 100,000 and a 50% chance of $ 0

c. 50% chance of $ 200,000 and a 50% chance of a loss of $ 100,000

d. 50% chance of $ 500,000 and a 50% chance of loss of $ 400,000 This problem can be solved by preparing a graph similar to Figure 6.1.

Figure 6.1

1. Draw in the tax rate schedule for taxable income in the range $ 500,000 to +$ 500,000 with taxable income on the horizontal axis and tax payable on the vertical axis.

2. Mark the two endpoints on the tax schedule for each project. (For project 2 the two endpoints are $ 0 and $ 50,000.) Draw a straight line between the two outcomes.

3. Draw a vertical line upward from the horizontal axis at taxable income equal to $ 50,000.

4. Finally, read off the expected tax payable for each project where the expected tax payable is the intersection point of the lines in (2) and (3).

## Answer to relevant Questions

Suppose the tax rate is 0% for taxable income less than $ 0 (again no tax refunds for losses and no NOL carry back or carry forwards). For positive taxable income up to and including $ 25,000, the tax rate is 15%; for ...A tax planner for a start up biotechnology company is advising her client about how to efficiently organize R& D activities. One suggestion the tax planner made is to form a joint venture with another biotech company. List ...What is meant by the term strategy-dependence as it relates to the computation of the marginal tax rate? How does strategy-dependence affect the computation of the marginal tax rate? How does it affect decision-making ...Why would a taxpayer be willing to pay a lawyer to provide a written opinion to a third party of the tax treatment to be accorded a particular set of transactions? A currently profitable bricks-and-mortar retail firm is under attack from several Internet start-up firms. The top management has decided to join the Web competition and open up an Internet store. Given the strong ...Post your question