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Estimating and Evaluating Proxies for the Marginal Tax Rate

Author

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  • Kerry Pattenden

    (School of Business and Economics, Sydney University, Sydney NSW 2006. Email: kpattenden@econ.usyd.edu.au)

Abstract

Graham (1996b) tested proxies for the marginal tax rate and derived a number of important results. This paper re-examines two factors raised by Graham's work: the impact of tax regulations on proxy performance, and the presence of bias in proxy construction. Simulation methods create a simple tax world where the ‘true’ marginal tax rate is known. Tax proxies are ranked against this rate using regression diagnostics. Manzon's proxy is the best performing of the simple tax proxies tested and is an unbiased estimate of the underlying tax process. The impact on proxies of tax loss treatments is assessed. Evidence is found that proxies differ in performance across different loss treatments. Evidence is found of an inbuilt preference between some variants of a simulated tax proxy and the tax benchmark.

Suggested Citation

  • Kerry Pattenden, 2002. "Estimating and Evaluating Proxies for the Marginal Tax Rate," Australian Journal of Management, Australian School of Business, vol. 27(2), pages 187-202, December.
    • Handle: RePEc:sae:ausman:v:27:y:2002:i:2:p:187-202
    DOI: 10.1177/031289620202700205
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    References listed on IDEAS

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    1. Hayn, Carla, 1989. "Tax attributes as determinants of shareholder gains in corporate acquisitions," Journal of Financial Economics, Elsevier, vol. 23(1), pages 121-153, June.
    2. Poterba, James M & Summers, Lawrence H, 1984. "New Evidence that Taxes Affect the Valuation of Dividends," Journal of Finance, American Finance Association, vol. 39(5), pages 1397-1415, December.
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    Cited by:

    1. Shumi Akhtar, 2017. "Capital structure of multinational and domestic corporations – a cross-country comparison," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 57(2), pages 319-349, June.

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