Is the Effective Tax Rate an Effective Performance Measure?

20 Pages Posted: 29 Jul 2005

See all articles by Robert Halperin

Robert Halperin

University of Illinois at Urbana-Champaign

Richard C. Sansing

Tuck School of Business at Dartmouth

Date Written: July 14, 2005

Abstract

This paper examines the properties of the effective tax rate (ETR) as a measure of managerial tax planning effectiveness using a principal-agent model. ETR is calculated as Tax Expense (computed pursuant to SFAS No. 109) divided by Income Before Taxes. The changes in ETR due to the agent's actions are systematically different from the changes in the principal's tax burden. These differences suggest that ETR is an ineffective measure of the agent's performance.

Keywords: Performance evaluation, tax planning, effective tax rates, agency theory

JEL Classification: D23, H32, J33, M52

Suggested Citation

Halperin, Robert and Sansing, Richard C., Is the Effective Tax Rate an Effective Performance Measure? (July 14, 2005). Available at SSRN: https://ssrn.com/abstract=761686 or http://dx.doi.org/10.2139/ssrn.761686

Robert Halperin

University of Illinois at Urbana-Champaign ( email )

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Richard C. Sansing (Contact Author)

Tuck School of Business at Dartmouth ( email )

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