Inventories, credit transactions, and the marginal effective tax rate

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It is observed that marginal effective tax rates (METR), as conventionally calculated, can only consider working capital requirements to a limited extent. A formula is derived to incorporate inventory requirements into the calculation and, via a numerical example, it is shown that such an incorporation can radically alter METRs from those conventionally calculated. The analysis is extended to credit transactions without affecting the above conclusion. Thus, if METRs are to be used as a means of evaluating the effects of tax policy on the incentive to invest, working capital requirements need to be explicitly allowed for. © 1985.
Original languageEnglish
Pages (from-to)225-231
Number of pages6
JournalJournal of Accounting and Public Policy
Issue number3
Publication statusPublished - Sept 1985


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