Proxies for the Corporate Marginal Tax Rate
Posted: 19 Jun 1998
Date Written: April 1996
Abstract
This paper focuses on how best to measure the corporate marginal tax rate, which is an important input into financial analysis of the cost of capital, financing policy, corporate hedging, and corporate reorganizations. The results indicate that the simulated tax rate used by Shevlin (1990) and Graham (1996), although difficult to calculate, is the best available proxy for the "true" marginal tax rate. If the simulated rate is unavailable, an easy-to-calculate trichotomous variable or the statutory marginal tax rate (which captures the progressivity in the tax rate schedule) are reasonable alternatives, better than most commonly used tax variables. The difficult task of forecasting taxable income is also discussed.
JEL Classification: G32
Suggested Citation: Suggested Citation