Whena firm hasglobal operations, its income istaxed at
differentratesindifferentlocales.Whenthisoccurs,whatis
themarginaltaxrateforthefirm?Therearethreewaysin
which we can deal with different tax rates.
1.Thefirstistouseaweightedaverageofthemarginaltax
rates,withtheweightsbased ontheincomederivedbythe
firm from each of these countries. The problem with this
approachisthattheweightswillchangeovertimeifincome
is growing at different rates in different countries.
2.Thesecondistousethemarginaltaxrateofthecountryin
which the company is incorporated, with the implicit
assumptionbeingthattheincomegeneratedinothercountries
willeventuallyhavetoberepatriatedtothecountryoforigin,
atwhichpointthefirmwillhavetopaythemarginaltaxrate.
Thisassumesthatthehomecountryhasthehighestmarginal
tax rate of all other countries.
3.Thethirdandsafestapproachistokeeptheincomefrom
eachcountryseparateandapplyadifferentmarginaltaxrate
to each income stream.
Effects of Tax Rate on Value
Invaluingafirm,shouldweusethemarginalortheeffective
taxrates?Ifthesametaxratehastobeappliedtoearnings
everyperiod,thesaferchoiceisthemarginaltaxratebecause
none of the reasons for lower effective tax rates can be
sustainedinperpetuity.Asnewcapitalexpenditurestaperoff,
thedifferencebetweenreportedandtaxincomewillnarrow;
taxcreditsareseldomperpetual;andfirmseventuallydohave
topaytheirdeferredtaxes.Thereisnoreason,however,why