Calculate Annual Tax Rate

Tax Liability

  1. A corporation has $7 mil. in equity. During the tax year it takes in $4 million in receipts and earns $ 2 million in capital gains from sale of subsidiary. It incurs labor costs of $1 million, interest costs of $250,000, material costs of $500,000, and pays rent for structure of $250,000.

    Calculate the corporation’s total accounting profit and assuming that the profit is fully taxable, calculate its tax liability using the tax rates in this table:

Taxable Income ATR at begin of bracket MTR
Less than 50,0000%15%
more than 50,000 but less than 75,0015%25%
more than 75,000 but less than 10 million 18%34%
more than 10 mil34%35%

Calculate the ATR (annual tax rate) of the corporation as a percentage of its economic profit, assuming that the opportunity cost of capital is 8%.

Equity= 7 Million

Tax Receipt4000000
Capital Gain From Sale of Subsidiaries2000000
Total Income6000000
Labour Cost1000000
Interest Cost250000
Material Cost500000
Accounting Profit4000000
Tax (at 34%)1360000
After Tax Income2640000

2. Suppose the corporate income tax were eliminated and corporate income allocated to shareholders on a pro rata basis according to their proportion of outstanding stock. How would such a change in tax policy affect the excess burden and incidence of the tax, assuming that all forms of investment income are included in a comprehensive income tax base?

If the interest of organisation and individuals are not aligned then there are classical cases like Arthur Anderson and Enron comes up in the public world. This case tries to highlight how a corporation like Arthur Anderson came to such demise. 80 years of legendary innovative history in Corporate America that was created by Arthur Anderson was washed up in a matter of 8 years. Internal divisions came up in the company and the world started to look at Corporate America with shame.

To align the principal agent theory in practice, Sarbanes Oxley came into operation in 2002. The act tried to align the best interest of the shareholders and the agent i.e. Management in the same mould. The objective of the act was to reduce the ever growing gap between the two of the main functions of the organisation.

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