Some Remarks on the Employment of the Stylized Income Tax Rate for Valuation of a Company by the IDW

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This article deals with the question whether the stylized income tax rate of 35 per cent used up to now by the IDW for valuation of companies has been properly calculated and whether it is still appropriate to use this income tax rate. The stylized income tax rate is an average tax rate, calculated empirically on the basis of 1989 German tax law as well as the personal income distribution in 1989. However, valuation of a company requires marginal tax rates. By the use of micro simulation and group simulation models we empirically demonstrate on the basis of German income tax data that due to the progressive German tax schedule an average tax rate can not serve as a proxy for a marginal tax rate. Therefore it is necessary to use a stylized income tax rate which is determinated by empirically calculated marginal tax rates. As a result of several tax cuts in recent years marginal tax rates in 2006 are considerable lower than in 1989. Therefore the employment of a stylized tax rate by the IDW that is based on dates of 1989 is inappropriate. Furthermore the empirical results falsifies the assertion that effective tax rates are unaffected by tax cuts due to simultaneous extensions of the tax base. Another finding of this article is a considerable variation of the empirical marginal tax rate depending on the group of taxpayer considered.