Question

Can some finance experts explain which of the following is more important to a business: Average tax rate vs Marginal tax rate and why?

Answer 1

Average tax rate is calculated by total tax paid divided by the income. It is the rate at which business pay tax.

Marginal tax rate is used to calculate extra tax paid for extra income. It is highest tax rate paid by the organisations.

For business people Marginal tax rate is more important.

In analysis of a business, management use incremental cash flows approach. Incremental cash flow means extra cash flow from the project. Marginal tax is calculated on incremental income . So business people will know how extra tax we should pay by accepting that project by using marginal tax rate.