Is the Effective Tax Rate an Effective Performance Measure?
20 Pages Posted: 29 Jul 2005
Date Written: July 14, 2005
This paper examines the properties of the effective tax rate (ETR) as a measure of managerial tax planning effectiveness using a principal-agent model. ETR is calculated as Tax Expense (computed pursuant to SFAS No. 109) divided by Income Before Taxes. The changes in ETR due to the agent's actions are systematically different from the changes in the principal's tax burden. These differences suggest that ETR is an ineffective measure of the agent's performance.
Keywords: Performance evaluation, tax planning, effective tax rates, agency theory
JEL Classification: D23, H32, J33, M52
Suggested Citation: Suggested Citation