2. Suppose the tax rate is 30% if taxable income is positive and 0% if taxable income is negative. Thus, the rate structure is steeply progressive. Consider the before-tax payoffs to the following three projects:[1]

a. Riskless: 10% for sure

b. Moderately risky: 30% half the time 10% half the time

c. Quite risky: 300% one time in 10 20% nine times out of 10

Required:

(2) How does the variability of returns affect the expected tax rate? Why?

(3) Does this tax structure encourage or discourage risky start-up ventures?