- If itis a smallfirmand the taxrate ishigher for
higherincomebrackets,theaverage taxrate across
allincomewillbelowerthanthetaxrateonthelast
dollarofincome.Forlargerfirms,wheremostofthe
incomeisatthehighesttaxbracket,thisislessofan
issue. - Publiclytraded firms,atleastin theUnitedStates,
often maintain two sets of books, one for tax
purposes and one for reporting purposes. They
generallyusedifferentaccountingrulesforthetwo
andreportlowerincometotaxauthoritiesandhigher
incomeintheirannualreports.Sincetaxespaidare
based on thetaxbooks, theeffective taxrate will
usually be lower than the marginal tax rate. - Actionsthatdeferordelaythepaymentoftaxescan
alsocausedeviationsbetweenmarginalandeffective
taxrates.Intheperiodwhentaxesaredeferred,the
effectivetaxratewilllagthemarginaltaxrate.Inthe
periodwhenthedeferredtaxesarepaid,theeffective
taxrate canbemuchhigher thanthemarginaltax
rate.
Thebestsourceofthemarginaltaxrateisthetaxcodeofthe
countrywherethefirmearnsitsoperatingincome.Ifthereare
state and local taxes,theyshould be incorporated intothe
marginal tax rate as well. For companies in multiple tax
locales,themarginaltaxrateusedshouldbetheaverageof
the different marginal tax rates, weighted by operating
income by locale.
Toobtainthetaxadvantagesofborrowing,firmshavetobe
profitable.In other words, there isno tax advantagefrom
interestexpensestoafirmthathasoperatinglosses.Itistrue