The statutory tax rate differs from a firm's average tax rate due to which of the following reasons?
A) The statutory tax rate is a marginal tax rate.
B) Some expenses are included in book income but do not enter into taxable income.
C) The average tax rate is for a period of three years.
D) The statutory tax rate does not affect GAAP measures of revenues and expenses.

Question

Quizplus · Accepted Answer

Some expenses, such as depreciation, may be included in a firm's book income but not in its taxable income, which leads to a difference between the statutory tax rate (which is applied to taxable income) and the average tax rate (which is calculated using book income and tax paid). The other options are incorrect: A is only partly correct (statutory tax rate is indeed marginal), C is wrong (the average tax rate can be for any period), and D is also wrong (GAAP measures are affected by taxes).

The Statutory Tax Rate Differs from a Firm's Average Tax