firmsandthechoicewefacebetweenthetwoinvaluation.
Thesecond issue arises usuallywith younger firms and is
causedbythelargelossestheyoftenreport,leadingto net
operatinglossesthatarecarriedforwardandcansavetaxesin
futureyears.Thethirdissuearisesfrom thecapitalizing of
researchanddevelopmentandotherexpenses.Thefactthat
these expenditures can be expensed immediately leads to
much higher tax benefits for the firm.
Effective versus Marginal Tax Rate
Wearefacedwithachoiceofseveraldifferenttaxrates.The
mostwidelyreportedtaxratein financialstatementsisthe
effective tax rate, which is computed from the reported
income in the financial statements.
Thetaxableincomeisusuallybeforeextraordinaryitemsand
goodwill amortization.
Thesecondchoiceontaxratesisthemarginaltaxrate,which
isthetaxratethefirmfacesonitslast(ornext)dollar of
income.Thisratedependsonthetaxcodeandreflectswhat
firmshavetopayastaxesontheirmarginalincome.Inthe
UnitedStates,forinstance,thefederalcorporatetaxrateon
marginalincomeis 35 percent;withtheadditionofstateand
localtaxes,mostfirmsfaceamarginalcorporatetaxrateof
close to 40 percent.
While themarginal taxratesfor most firms in theUnited
Statesshouldbefairlysimilar,therearewidedifferencesin