A Critique of Plesko's 'An Evaluation of Alternative Measures of Corporate Tax Rates'

Abstract

In a recent working paper, Plesko (1999) uses confidential tax return data to evaluate alternative measures of corporate average and marginal tax rates and concludes “The results suggest that commonly used measures of average tax rates provide little insight about annual corporate tax burdens, and may introduce substantial bias into statistical models. Marginal tax rate proxies perform better, but there appears to be little, if any, empirical value added by methods that go beyond easily constructed measures traditionally used in the literature.” I caution readers in accepting the above inferences because of conceptual flaws in Plesko’s evaluation. In evaluating financial statement based average tax rates, Plesko assumes researchers are attempting to estimate statutory tax burdens (tax payable as a percent of taxable income) whereas I would argue that most researchers are attempting to examine a more general concept of corporate tax burdens (tax payable as a percent of book income). Which tax burden is appropriate depends on the research question but Plesko assumes the statutory tax burden is always the appropriate measure. In evaluating financial statement based marginal tax rates, Plesko uses a single period measure which fails to take into account the effects of carryback and carryforward rules in calculating taxable income. Thus his marginal tax rate benchmark is flawed.