Final answer:
The tax rate used to measure deferred tax assets and liabilities is the enacted rate in the year the differences reverse. This rate is applied to temporary differences that will reverse in the future, where the actual tax obligations or recoveries will occur. The correct answer is option: c) enacted rate in the year the differences reverse.
Step-by-step explanation:
The tax rate used to measure deferred tax assets and liabilities is the enacted rate in the year the differences reverse. Deferred tax assets and liabilities are calculated based on temporary differences between the financial statement carrying amounts and the tax bases of assets and liabilities.
These temporary differences will reverse in the future, and the enacted tax rate at the time of reversal will apply. Therefore, while the effective tax rate is useful for understanding the amount a company actually pays in taxes in a given year, it is not the rate used for measuring deferred taxes.
It's important to note that deferred tax assets represent amounts that are expected to be recovered in the future when the related temporary differences reverse at the enacted tax rate. Similarly, deferred liabilities are obligations that are expected to be settled in the future when these differences reverse at the enacted tax rate.
Understanding the difference between the marginal tax rate, which affects labor supply decisions, and the average tax rate is important for comprehending the overall economic impact of taxes.
According to the Laffer curve, a tax cut does not always increase tax revenues; this curve demonstrates the relationship between tax rates and tax revenue, showing that there can be a point at which further increasing tax rates actually leads to lower tax revenues.