An evaluation of alternative measures of corporate tax rates

This paper examines the ability of financial statement measures of average and marginal tax rates (MTR) to capture tax attributes utilizing firm-level tax and financial data. The results suggest commonly used average tax rate measures provide little insight about statutory tax burdens, and may introduce substantial bias into analyses of tax incidence. Financial statement-based proxies for MTR, particularly those based on simulation methods, are found to perform well in estimating current year tax rates. Both current year and present value MTR $This research was performed while I was on temporary assignment with the Internal Revenue Service. I am grateful for the cooperation and assistance of the Statistics of Income Division, particu-larly Karen Cys, Terry Danby, Nick Greenia, Mike Leszcz, Ken Szeflinski, and to the Boston Taxpayer Services Division. I am especially indebted to Allison Clark for her help in setting up the database used in this paper and the research assistance of Joanne Tao (without whom the tax calculator may never have been completed) and Ying Li. Sharad Asthana generously provided some of th