Question

Regarding income taxes, which do you think is more important (and why)-- the average tax rate that a firm pays or the marginal tax rate the firm is paying?

Answer 1

Solution

For firms/organizations, average tax is significant because it refers to the actual income tax that the firm has to pay according to the rates set by the government for firms operating in the country. However, the marginal tax rate is more significant for indiviuals as compared to the firms as it indicates what level of income they are in & corresponding taxes at each tax slab.

The average tax rate will help a firm determine what type of capital structure it must follow (more debt or equity) dependinf on the rates to get tax benefits. Hence average tax rate is more important than a marginal tax rates for the firms