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Using Tax Return Data to Simulate Corporate Marginal Tax Rates


  • John R. Graham
  • Lillian F. Mills


We document that simulated corporate marginal tax rates based on financial statement data (Shevlin 1990 and Graham 1996a) 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.

Suggested Citation

  • John R. Graham & Lillian F. Mills, 2007. "Using Tax Return Data to Simulate Corporate Marginal Tax Rates," NBER Working Papers 13709, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:13709
    Note: CF PE

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    References listed on IDEAS

    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 865-893, December.
    2. 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.
    3. 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, February.
    4. repec:bla:joares:v:36:y:1998:i:1:p:157-166 is not listed on IDEAS
    5. 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.
    6. 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, August.
    7. Desai, Mihir A. & Dharmapala, Dhammika, 2006. "Corporate tax avoidance and high-powered incentives," Journal of Financial Economics, Elsevier, vol. 79(1), pages 145-179, January.
    8. Graham, John R., 1996. "Debt and the marginal tax rate," Journal of Financial Economics, Elsevier, vol. 41(1), pages 41-73, May.
    9. 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.
    10. Graham, John R., 1999. "Do personal taxes affect corporate financing decisions?," Journal of Public Economics, Elsevier, vol. 73(2), pages 147-185, August.
    11. Graham, John R., 1996. "Proxies for the corporate marginal tax rate," Journal of Financial Economics, Elsevier, vol. 42(2), pages 187-221, October.
    12. 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 407-442, October.
    13. John R. Graham, 2003. "Taxes and Corporate Finance: A Review," Review of Financial Studies, Society for Financial Studies, vol. 16(4), pages 1075-1129.
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    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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