Corporate Form of Business Enterprise - Essay Example

3: Instructor-Graded Assignment

1. Ellen’s income in 1993 was $67,000. $3,500 of her income was exempt from tax. Ellen is single. Using the table below (also included in this lesson), answer the following questions.

Total taxable income

Marginal tax rate

0 – $22,100

15%

22,100 – 53,500

28%

53,500 – 115,000

31%

115,000 – 250,000

36%

250,000 +

39.6%

1. What is Ellen’s tax bracket?

          31% tax bracket.

1. What percentage of Ellen’s income does she pay as an income tax? Show your work!

Total Income = $67,000

Total taxable income = $67,000- $3,500 = $63,500.

Tax paid on first $22,100 = .15 x $22,100 = $3,315

Tax paid on next $53,500 - $22,100 = $31,400 = .28 x $31,400 = $8,792

Tax paid on final $63,500 - $53,500 = $10,000 = .31 x $10,000 = $3,100

Total tax paid = $3,315 + $8,792 + $3100 = $15,207

Percentage of income paid in tax =( $15,207/$67,000) x 100 = 22.7%

2. Answer the following questions.

1. Suppose the consumption of a good entails rather sizable spillover benefits. How might the resulting misallocation of resources be corrected?

To create a situation in which the quantity of the good consumed is equal to the social marginal benefit rather than the private marginal benefit, a subsidy should be provided to individuals. This would reduce private marginal costs to provide a more optimal allocation of resources. This is shown in Fig. 1. In the first graph, a positive externality exists because the marginal private benefit from the consumption of the good exceeds the marginal social benefit and the market outcome will be Qp. With a subsidy, the marginal cost of the good is lowered to increase consumption to Qs such that MC = MSB.

1. Name a good which is accompanied by spillover benefits.

The consumption of education is an example of the consumption of a good that provides a social benefit that exceeds the private benefit that the student receives. Society benefits from having a skilled labor force which lowers unemployment rates and increases domestic productivity. This benefit exceeds the private benefit a single individual receives from consuming education. As such, those that choose to not consume education may decide not to do so because they will enjoy the benefits of a skilled labor force.

3. Explain the difference between government expenditures for goods and services and transfer payments. Give examples of expenditures that fall into each of the two categories.

Government expenditures on goods and services are primarily done because the market system would not efficiently allocate resources to produce these goods or services. This could be because consumption of the good or service provides a considerable social benefit that the market cannot quantify, or the good or service is non-excludible, meaning that once provided, no one can be excluded from consuming it. Thus in order to assure optimum provision and consumption of the good, the government would

Government transfer payments are direct money payments from the government to vulnerable segments of society. These payments redistribute income to more vulnerable members of society.

Government Expenditure

Government Transfers

Defense sector

Benefits/Welfare

Healthcare

Pension

Infrastructure such as roads

4. What are the advantages and disadvantages associated with the corporate form of business enterprise? Explain.

The corporation is treated as a separate entity for tax and legal purposes. As such there are a number of benefits associated with incorporating a business. In Limited Liability companies, owners of the corporation are not liable for the corporation’s debts.