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Jurisdiction B levies a flat 7 percent tax on the first $5 million of annual corporate income. Required: Jersey Inc. generated $3.9 million income this year. Compute Jersey’s income tax and determine its average and marginal tax rate on total income. Leray Inc. generated $9.6 million income this year. Compute Leray’s income tax and determine Leray’s average and marginal tax rate on total income. What type of rate structure does Jurisdiction B use for its corporate income tax?

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Answer:

a. Jersey Inc. generated $3.9 million income this year.

Income tax

= 3.9 million * 7%

= $273,000

The Average tax rate

= Tax/ Income

= 273,000/3.9 million

= 7%

Marginal tax is the additional tax per dollar. As this is less than the $5 million threshold, it is 7%

b. Leray Inc. generated $9.6 million income this year.

Income tax

= 5 million * 7%

= $350,000

The Average tax rate

= Tax/ Income

= 350,000/9.6 million

= 3.6%

Marginal tax is the additional tax per dollar. As this is more than the $5 million threshold, and they do not have to pay any more tax, the Marginal rate is 0%.

c. What type of rate structure does Jurisdiction B use for its corporate income tax?

Regressive Rate structure

In this regime, the average tax decreases as the income earned increases. Looking at Leray Inc, this appears to be the case so this is a Regressive Rate Structure.

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