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Algorithm for calculating corporate marginal tax rate using Monte Carlo simulation

Author

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  • Sinha, Pankaj
  • Bansal, Vishakha

Abstract

Simulated marginal tax rates involve complex calculations of simulating future (uncertain) incomes and mimicking corporate tax code. This paper develops two algorithms to calculate simulated marginal tax rate. The codes have been developed to forecast future taxable income of Indian companies and their Marginal Tax Rates (MTR) using Monte Carlo simulation in MATLAB. Loss carry forward and minimum alternate tax rules have been incorporated in both the algorithms. Further, a change is made in both the algorithms to incorporate loss carry backward feature to suit the needs of the country where such laws are applicable. The 10000 simulations in MATLAB suggest that MTR is company specific and it is dependent on the income pattern of the company. The MTR increases when loss carry backward rule is applied. In cases where the company actually pays zero tax in a year due to incurred losses, it is found that even in such cases MTR may be non zero. It is found that there is enough cross sectional and time series variations in MTR, therefore, the effect of tax rates on various policy issues of government and companies can be studied by taking MTR as an effective proxy for tax rates.

Suggested Citation

  • Sinha, Pankaj & Bansal, Vishakha, 2012. "Algorithm for calculating corporate marginal tax rate using Monte Carlo simulation," MPRA Paper 40811, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:40811
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    File URL: https://mpra.ub.uni-muenchen.de/40811/1/MPRA_paper_40811.pdf
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    References listed on IDEAS

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    Cited by:

    1. Sinha, Pankaj & Bansal, Vishakha, 2013. "Capital structure puzzle: the interrelationship between leverage, taxes and other micro economic factors," MPRA Paper 49878, University Library of Munich, Germany, revised 17 Sep 2013.
    2. José A. Clemente-Almendros & Francisco Sogorb-Mira, 2016. "The effect of taxes on the debt policy of spanish listed companies," SERIEs: Journal of the Spanish Economic Association, Springer;Spanish Economic Association, vol. 7(3), pages 359-391, August.

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    More about this item

    Keywords

    Marginal tax Rate; Corporate taxes; Loss carry forward; Alternate minimum tax; Loss carry backward; Tax code;
    All these keywords.

    JEL classification:

    • C6 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • K34 - Law and Economics - - Other Substantive Areas of Law - - - Tax Law

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