Why is it important to consider the personal income tax when ...

[wenmo]

Why is it important to consider the personal income tax when evaluating the corporate income tax? Give an example of how differential rates between the corporate and personal income tax rates can change taxpayer behavior.
 
  What will be an ideal response?

Question 2

Suppose Cournot duopolists firms face the same market demand curve, but have differing costs. At the Nash-Cournot equilibrium, the firm with the lower cost will
 
  A) have a lower price for its product than its competitor.
  B) produce a smaller output than its competitor.
  C) have a higher price for its product than its competitor.
  D) produce a larger output than its competitor.

[duy1981999]

Answer to Question 1

The corporate income tax cannot be fully understood without considering the personal income tax because the question of whether or not certain income should be taxed at the corporate level may depend on how it is taxed at the personal level. For example, the question of whether dividends should be taxed at the corporate level might depend on how they are taxed at the personal level. If the rates between the corporate and personal income taxes are different, it creates an opportunity for high-income taxpayers to incorporate. When personal income tax rates are higher than corporate income tax rates, the individual has an incentive to realize income through the corporation. When the opposite is true, the individual has an incentive to realize income at the personal level.

Answer to Question 2

D