Question

Robinson is subject to a 40 percent overall marginal tax rate. Is he better off if he receives a tax-free fringe benefit of $4,000 than receiving an equivalent raise in his salary? Why or why not?

Answer 1

Receiving a tax-free fringe benefit of $4,000 is more beneficial for Robinson than receiving an equivalent raise in his salary due to the 40 percent overall marginal tax rate.

Step-by-step explanation:

If Robinson is subject to a 40 percent overall marginal tax rate, receiving a tax-free fringe benefit of $4,000 would be more beneficial for him than receiving an equivalent raise in his salary. This is because the fringe benefit is tax-free, meaning Robinson does not have to pay taxes on it, while his salary increase would be subject to the 40 percent tax rate.

Let's calculate the difference:

1. Salary increase: $4,000 x 40% = $1,600 taxes
2. Net salary increase: $4,000 - $1,600 = $2,400
3. Tax-free fringe benefit: $4,000

As we can see, Robinson would be better off receiving the tax-free fringe benefit of $4,000 as it would be $2,400 more than the net salary increase.