EFFECTIVE INCOME TAX RATES BY STRUCTURAL MODELS OF BANKRUPTCY

Dan Han
University of North Carolina at Charlotte

Howard Qi
Michigan Technological University

Yan Alice Xie
University of Michigan at Dearborn

ABSTRACT

The taxation treatment of corporations has been one of the central issues regarding firm valuation. The statutory income tax rates differ significantly by states. The system of tax codes is further complicated by a variety of exemptions, deferrals and potential loopholes. Many types of institutional investors enjoy different degrees of beneficial tax treatments. All these factors make the “true tax rates” an elusive factor in valuing a firm or project regardless of how theoretically accurate the valuation formula might be. Therefore, a meaningful task is to reasonably estimate the effective corporate income tax rate. But this task becomes more challenging due to the interaction of tax shields and capital structure policies. The results are interesting in making economic sense and also in pointing out the direction of improvements in structural modeling of default.

Keywords: Effective tax rate, structural model, default risk, fixed debt, stationary leverage, optimized leverage