Sinha, Pankaj and Bansal, Vishakha (2012): Algorithm for calculating corporate marginal tax rate using Monte Carlo simulation.
Download (2689Kb) | Preview
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.
|Item Type:||MPRA Paper|
|Original Title:||Algorithm for calculating corporate marginal tax rate using Monte Carlo simulation|
|English Title:||Algorithm for calculating corporate marginal tax rate using Monte Carlo simulation|
|Keywords:||Marginal tax Rate, Corporate taxes, Loss carry forward, Alternate minimum tax, Loss carry backward, Tax code|
|Subjects:||C - Mathematical and Quantitative Methods > C6 - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling
C - Mathematical and Quantitative Methods > C6 - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling > C63 - Computational Techniques; Simulation Modeling
G - Financial Economics > G3 - Corporate Finance and Governance > G38 - Government Policy and Regulation
C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General > C15 - Statistical Simulation Methods: General
K - Law and Economics > K3 - Other Substantive Areas of Law > K34 - Tax Law
|Depositing User:||Pankaj Sinha|
|Date Deposited:||22. Aug 2012 13:25|
|Last Modified:||12. Feb 2013 10:02|
Alworth, J and Arachi, G., 2000, "The Effect of Taxes on Corporate Financing Decisions: Evidence from a Panel of Italian Firms," International Tax and Public Finance, 8, 353-376.
Grady, Patrick, 1986, "The Recent Corporate Income Tax Reform Proposals in Canada and the United States," Canadian Tax Journal, 34(1), 111-128.
Graham, John R., 1996a, "Debt and the Marginal Tax Rate,” Journal of Financial Economics, 41, 41-74.
Graham, John R., 1996b, “Proxies for the corporate marginal tax rate,” Journal of Financial Economics, 42, 187–221.
Graham, John R. and Lemmon Michael L, 1998, “Measuring Corporate Tax Rates and Tax Incentives: A New Approach,” Journal of Applied Corporate Finance, 11(1), 54 - 65.
Gogas, Periklis, 1997, "On the construction of personal, corporate and effective overall marginal tax rates for Canada (1977-1992)," The Saskatchewan Economic Journal, 1 (1), 23-32.
Kotikoff, Laurence J. and Rapson, David, 2005, "Comparing average and marginal tax rates under the fairtax and the current system of federal taxation," NBER Working Paper Series, Working Paper 11831.
Lemmon, Michael L. and Graham, John R., 1998, " Measuring Corporate Tax Rates and Tax Incentives: A New Approach," Journal of Applied Corporate Finance, 11.1, 54-65.
Padovano, Fabio and Galli, Emma, 2002, "Comparing the growth effects of marginal vs. average tax rates and progressivity," European Journal of Political Economy, 18, 529–544.
Plesko, George A., 2003, "An evaluation of alternative measures of corporate tax rates," Journal of Accounting and Economics, 35, 201-226.
Ramb, Fred, 2007, "Corporate marginal tax rate, tax loss carry-forwards and investment functions – empirical analysis using a large German panel data set," Deutsche Bundesbank, Discussion Paper Series 1: Economic Studies No 21.
Rao, Ramesh K.S. and Stevens, Eric C., 2006, "The Firm’s Cost of Capital, Its Effective Marginal Tax Rate, and Value of the Government's Tax Claim," Topics in Economic Analysis & Policy,6 (1), Article3
Shackelford, Douglas A and Shevlin, Terry, 2001, "Empirical tax research in accounting," Journal of Accounting and Economics, 31, 321-387.
Shevlin, T., 1990, "Estimating Corporate Marginal Tax Rates with Asymmetric Tax Treatment of Gains and Losses,” The Journal of the American Taxation Association, 12, 51-67.