An Evaluation of Alternative Measures of Corporate Tax Rates

Abstract

This paper examines the ability of financial statement measures of average and marginal tax rates to capture tax attributes utilizing a matched sample of firm-level tax return and Compustat data.

The results suggest that commonly used average tax rate measures provide little insight about annual statutory corporate tax burdens, and may introduce substantial bias into statistical analyses of tax incidence. Financial statement-based proxies for marginal tax rates, particularly those based on simulation methods, are found to perform well in estimating current year tax rates. Further, both current year and present value marginal tax rates are found to be highly correlated with an easily constructed binary proxy of firms' tax status.

Keywords: corporate tax rate, effective tax rate, marginal tax rate, taxes, measurement error

JEL Classification: G30, H25, M41, C20