Nearly twenty years after the publication of King-Fullerton, effective tax rates have grown into a widely accepted tool of public policy. They have been calculated for a large number of countries, applied in different empirical studies of investment behaviour, and employed to back changes in public policies. At the same time, the King Fullerton approach appears to retain a number of weaknesses particularly in respect of company’s financing behaviour that have never been fully resolved. This paper proposes a new method of measuring effective tax rates that explicitly takes account of risk. The measure is based on the modern theory of corporate finance and allows for the pricing of risk. It is more encompassing than those previously proposed and the King-Fullerton measure can be shown to be special limiting case. This new measure has a number of additional features: (a) effective tax rates are uniquely defined as a function of a company’s optimal debt/equity ratio which is endogenously determined; (b) this measure is shown to be related to forward looking measures of effective tax rates such as those suggested by Shevlin (1990) and Graham (1996).
An integrated approach to measuring effective tax rates
ARACHI, Giampaolo
2007-01-01
Abstract
Nearly twenty years after the publication of King-Fullerton, effective tax rates have grown into a widely accepted tool of public policy. They have been calculated for a large number of countries, applied in different empirical studies of investment behaviour, and employed to back changes in public policies. At the same time, the King Fullerton approach appears to retain a number of weaknesses particularly in respect of company’s financing behaviour that have never been fully resolved. This paper proposes a new method of measuring effective tax rates that explicitly takes account of risk. The measure is based on the modern theory of corporate finance and allows for the pricing of risk. It is more encompassing than those previously proposed and the King-Fullerton measure can be shown to be special limiting case. This new measure has a number of additional features: (a) effective tax rates are uniquely defined as a function of a company’s optimal debt/equity ratio which is endogenously determined; (b) this measure is shown to be related to forward looking measures of effective tax rates such as those suggested by Shevlin (1990) and Graham (1996).I documenti in IRIS sono protetti da copyright e tutti i diritti sono riservati, salvo diversa indicazione.
