The United States switched from the progressive tax system to a flat tax system, effective from...
The United States switched from the progressive tax system to a flat tax system, effective from January 1, 2018. This had led to a significant impact on the profitability of many corporate organizations. By switching to the new tax system, will the tax depreciation of assets affect a firm's net income? You may explain with an example.
Homework Answers
The switch from a progressive tax system to a flat tax system is definitely going to impact the net income of a firm.
For example, in a progressive tax system, the depreciation tax shield applies at the highest marginal rate. However in the case of a flat tax system, the depreciation tax shield is also flat.
As an example, the below illustration explains
| Progressive system | |||||||
| Tax system: | EBIDTA | 12000 | |||||
| Depreciation | 500 | ||||||
| PBT | 11500 | ||||||
| PBT | Tax | Tax on EBIDTA | Tax on PBT | ||||
| <2000 | Nil | 0 | 0 | ||||
| 2000-5000 | 10% | 300 | 300 | ||||
| 5000-10000 | 300+20%*income exceeding 5000 | 1000 | 1000 | ||||
| > 10000 | 1300 + 30%*income exceeding 10000 | 600 | 450 | Avg tax rate | 15.22% | ||
| 1900 | 1750 | ||||||
| So total tax shield due to depreciation | 150 | (Dep value * highest tax rate) | |||||
| Flat system | |||||||
| Tax system: | EBIDTA | 12000 | |||||
| Depreciation | 500 | ||||||
| PBT | 11500 | ||||||
| Tax rate | 18% flat | Tax on EBIDTA | Tax on PBT | ||||
| 2160 | 2070 | ||||||
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ABC Income Statement
2018
Sales...............................................................
Operating costs (excluding
depreciation).............
EBITDA..............................................................
Depreciation.......................................................
EBIT
..................................................................
Interest
Expense.................................................
EBT....................................................................
Taxes*** ................
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Single Individuals
If Your Taxable Income Is
You Pay This
Amount on the
Base of the Bracket
Plus This Percentage
on the Excess over the
Base (Marginal Rate)
Average Tax
Rate at
Top of Bracket
Up to $9,525
$0
10.0
%
10.0
%
$9,525 - $38,700
952.50
12.0
11.5
$38,700 - $82,500
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22.0
17.1
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14,089.50
24.0
20.4
$157,500 - $200,000
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32.0
22.8
$200,000 - $500,000
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35.0
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ABC Income Statement
2018
Sales...............................................................
Operating costs (excluding
depreciation).............
EBITDA..............................................................
Depreciation.......................................................
EBIT
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Interest
Expense.................................................
EBT....................................................................
Taxes*** ................
2018 Individual Tax Rates
Single Individuals
If Your Taxable Income Is
You Pay This
Amount on the
Base of the Bracket
Plus This Percentage
on the Excess over the
Base (Marginal Rate)
Average Tax
Rate at
Top of Bracket
Up to $9,525
$0
10.0
%
10.0
%
$9,525 - $38,700
952.50
12.0
11.5
$38,700 - $82,500
4,453.50
22.0
17.1
$82,500 - $157,500
14,089.50
24.0
20.4
$157,500 - $200,000
32,089.50
32.0
22.8
$200,000 - $500,000
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35.0
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