Proxies for the Marginal Tax Rate
Posted: 15 Jul 1998
Date Written: December 1995
This paper focuses on how to best measure the corporate marginal tax rate, which is an important input into analysis of the cost of capital, financing policy, corporate hedging, corporate reorganizations, and the relative pricing between taxable and tax-advantaged securities. The results indicate that the simulated tax rate used by Shevlin (1990) and Graham (1996) is the best available proxy for the "true" marginal tax rate; however, the simulated variable is difficult to calculate. If the simulated rate is unavailable, a very easy-to-calculate trichotomous variable and the statutory marginal tax rate are reasonable alternatives, better than most commonly used tax variables. The difficult task of forecasting taxable income is also discussed.
JEL Classification: G30, H25
Suggested Citation: Suggested Citation