Question

Suppose you are about to start an innovative, high-tech company in one of two states. you expect before-tax profits to be about $100,000 per year. Both states have similar living conditions,climate, and other amenities but the tax rate in state A is 17 percent, while the tax is rate in B is 7 percent. By how much will your annual after-tax profit differ between the two states? From a business perspective, which state is a preferred location?

Answer 1

The difference in annual after-tax profit between State A with a 17% tax rate and State B with a 7% tax rate would be $10,000, favoring State B as the location for higher profitability.

Step-by-step explanation:

If you're considering starting an innovative, high-tech company and expect before-tax profits to be about $100,000 per year, the choice of location could impact your after-tax profits significantly due to differing state tax rates.

In state A with a tax rate of 17%, your tax payment would be $17,000 (0.17 × $100,000), leaving you with an after-tax profit of $83,000 ($100,000 - $17,000).

In contrast, in state B where the tax rate is only 7%, your tax payment would be $7,000 (0.07 × $100,000), which results in an after-tax profit of $93,000 ($100,000 - $7,000).

The annual after-tax profit between the two states would differ by $10,000, with state B being the more financially beneficial location due to its lower tax rate. When choosing a preferred location from a business perspective, lower taxes would enhance profitability which makes state B the favorable choice, assuming all other conditions such as living conditions, climate, and amenities are similar.