Final answer:
Interest on municipal bonds is non-taxable, so when Clerc Corp has this interest, it reduces their effective tax rate compared to the statutory rate because it is a form of income that is not subject to tax.
Step-by-step explanation:
When Clerc Corp experiences a permanent difference of $100,000 related to interest on municipal bonds, it signifies non-taxable income. In this context, interest earned from municipal bonds is typically exempt from federal income taxes. This results in a unique situation where this income doesn't reduce the company's taxable income but still contributes to its total income before taxes.
The effect of this permanent difference is a lower effective tax rate compared to the statutory rate. The statutory tax rate is the percentage imposed on taxable income, but since the municipal bond interest is not taxable, it creates a scenario where the company's total income is higher than its taxable income. Consequently, the effective tax rate, which is the actual tax burden as a proportion of total income, becomes lower.
This difference in tax treatment is advantageous for Clerc Corp as it experiences a decrease in its tax burden relative to its total income. The company benefits from earning a portion of its income in a form exempt from federal income taxes, allowing for more favorable financial outcomes and increased net income after taxes. This dynamic showcases the impact of permanent differences on tax liability and the nuanced ways in which certain types of income can influence a company's effective tax rate.