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Using tax return data to simulate corporate marginal tax rates

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  • Graham, John R.
  • Mills, Lillian F.

Abstract

We document that simulated corporate marginal tax rates based on financial statement data [Shevlin, T., 1990. Estimating corporate marginal tax rates with asymmetric tax treatment of gains and losses. The Journal of the American Taxation Association 11, 51-67; Graham, J., 1996a. Debt and the marginal tax rate. Journal of Financial Economics 41, 41-73] are highly correlated with simulated rates based on corporate tax return data. We provide algorithms that can be used to estimate the book or tax simulated rates when they are not available. We find that the simulated book marginal tax rate does a better job of explaining financial statement debt ratios than does the analogous tax return variable and discuss how the book-simulated rate is likely to be an appropriate measure in settings with global, long-term considerations.

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Article provided by Elsevier in its journal Journal of Accounting and Economics.

Volume (Year): 46 (2008)
Issue (Month): 2-3 (December)
Pages: 366-388

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Handle: RePEc:eee:jaecon:v:46:y:2008:i:2-3:p:366-388
Contact details of provider: Web page: http://www.elsevier.com/locate/jae

Keywords: Marginal tax rate Simulated tax rates Tax return data Financial statements Book tax difference Capital structure;

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Find related papers by JEL classification:
  • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
  • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
  • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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  1. Mills, Lillian F. & Plesko, George A., 2003. "Bridging the Reporting Gap: A Proposal for More Informative Reconciling of Book and Tax Income," National Tax Journal, National Tax Association, vol. 56(4), pages 865-93, December.
  2. Dechow, Patricia M., 1994. "Accounting earnings and cash flows as measures of firm performance : The role of accounting accruals," Journal of Accounting and Economics, Elsevier, vol. 18(1), pages 3-42, July.
  3. John R. Graham & Mark H. Lang & Douglas A. Shackelford, 2004. "Employee Stock Options, Corporate Taxes, and Debt Policy," Journal of Finance, American Finance Association, vol. 59(4), pages 1585-1618, 08.
  4. Graham, John R., 1999. "Do personal taxes affect corporate financing decisions?," Journal of Public Economics, Elsevier, vol. 73(2), pages 147-185, August.
  5. Graham, John R., 1996. "Debt and the marginal tax rate," Journal of Financial Economics, Elsevier, vol. 41(1), pages 41-73, May.
  6. Hanlon, Michelle & Laplante, Stacie Kelley & Shevlin, Terry, 2005. "Evidence for the Possible Information Loss of Conforming Book Income and Taxable Income," Journal of Law and Economics, University of Chicago Press, vol. 48(2), pages 407-42, October.
  7. John R. Graham & Michael L. Lemmon & James S. Schallheim, 1998. "Debt, Leases, Taxes, and the Endogeneity of Corporate Tax Status," Journal of Finance, American Finance Association, vol. 53(1), pages 131-162, 02.
  8. Mihir A. Desai & Dhammika Dharmapala, 2004. "Corporate Tax Avoidance and High Powered Incentives," NBER Working Papers 10471, National Bureau of Economic Research, Inc.
  9. John R. Graham, 2003. "Taxes and Corporate Finance: A Review," Review of Financial Studies, Society for Financial Studies, vol. 16(4), pages 1075-1129.
  10. Graham, John R., 1996. "Proxies for the corporate marginal tax rate," Journal of Financial Economics, Elsevier, vol. 42(2), pages 187-221, October.
  11. Collins, Daniel W. & Maydew, Edward L. & Weiss, Ira S., 1997. "Changes in the value-relevance of earnings and book values over the past forty years," Journal of Accounting and Economics, Elsevier, vol. 24(1), pages 39-67, December.
  12. Plesko, George A., 2003. "An evaluation of alternative measures of corporate tax rates," Journal of Accounting and Economics, Elsevier, vol. 35(2), pages 201-226, June.
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Cited by:

  1. Devos, Erik & Dhillon, Upinder & Jagannathan, Murali & Krishnamurthy, Srinivasan, 2012. "Why are firms unlevered?," Journal of Corporate Finance, Elsevier, vol. 18(3), pages 664-682.
  2. Lars P. Feld & Jost Henrich Heckemeyer & Michael Overesch, 2011. "Capital Structure Choice and Company Taxation: A Meta-Study," CESifo Working Paper Series 3400, CESifo Group Munich.
  3. Karpavičius, Sigitas, 2014. "The cost of capital and optimal financing policy in a dynamic setting," Journal of Banking & Finance, Elsevier, vol. 48(C), pages 42-56.
  4. Frydman, Carola & Molloy, Raven S., 2011. "Does tax policy affect executive compensation? Evidence from postwar tax reforms," Journal of Public Economics, Elsevier, vol. 95(11), pages 1425-1437.
  5. Colonnello, Stefano & Curatola, Giuliano & Ngoc Giang Hoang, 2014. "Executive compensation structure and credit spreads," SAFE Working Paper Series 60, Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt.
  6. John Graham & Jana Raedy & Douglas Shackelford, 2010. "Research in Accounting for Income Taxes," NBER Working Papers 15665, National Bureau of Economic Research, Inc.
  7. Markle, Kevin S. & Shackelford, Douglas A., 2012. "Cross-Country Comparisons Of Corporate Income Taxes," National Tax Journal, National Tax Association, vol. 65(3), pages 493-527, September.
  8. Annabi, Amira & Breton, Michèle & François, Pascal, 2012. "Resolution of financial distress under Chapter 11," Journal of Economic Dynamics and Control, Elsevier, vol. 36(12), pages 1867-1887.
  9. Edgerton, Jesse, 2010. "Investment incentives and corporate tax asymmetries," Journal of Public Economics, Elsevier, vol. 94(11-12), pages 936-952, December.
  10. Hess, Dieter & Immenkötter, Philipp, 2014. "How much is too much? Debt capacity and financial flexibility," CFR Working Papers 14-03, University of Cologne, Centre for Financial Research (CFR).
  11. Cohn, Jonathan B. & Mills, Lillian F. & Towery, Erin M., 2014. "The evolution of capital structure and operating performance after leveraged buyouts: Evidence from U.S. corporate tax returns," Journal of Financial Economics, Elsevier, vol. 111(2), pages 469-494.
  12. Douglas Shackelford & Joel Slemrod & James Sallee, 2011. "Financial reporting, tax, and real decisions: toward a unifying framework," International Tax and Public Finance, Springer, vol. 18(4), pages 461-494, August.
  13. Karpavičius, Sigitas, 2014. "Dividends: Relevance, rigidity, and signaling," Journal of Corporate Finance, Elsevier, vol. 25(C), pages 289-312.
  14. Hanlon, Michelle & Heitzman, Shane, 2010. "A review of tax research," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 127-178, December.

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