Refer to the corporate marginal tax rate information in Table 2.3.

a. Why do you think the marginal tax rate jumps up from 34 percent to 39 percent at a taxable income of $100,001, and then falls back to a 34 percent marginal rate at a taxable income of $335,001?

b. Compute the average tax rate for a corporation with exactly $335,001 in taxable income. Does this confirm your explanation in part (a)? What is the average tax rate for a corporation with income of exactly $18,333,334? Is the same thing happening here?
c. The 39 percent and 38 percent tax rates both represent what is called a tax €œbubble.€ Suppose the government wanted to lower the upper threshold of the 39 percent marginal tax bracket from $335,000 to $200,000. What would the new 39 percent bubble rate have to be?

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TAXABLE INCOME TAX RATE 0-50,000 15% 50,001–75,000 25 75,001–100,000 34 100,001-335,000 39 335,001-10,000,000 34 10,000,001–15,000,000 35 15,000,001–18,333,333 38 18,333,334+ 35