ASR No. 149 requires reporting companies to publish a reconciliation between their reported income tax expense and an amount equal to the statutory federal tax rate of 48 per cent multiplied by income before taxes. It defines the effective tax rate for this purpose as income tax expense divided by book income before taxes.

The author questions whether income tax expense is the best measure of a firm’s tax burden, based as it is on book income, which is affected by the choice of generally accepted accounting principles. Taxes currently payable, on the other hand, are based on taxable income and relatively unaffected by alternative accounting principles.

Using income taxes currently payable divided by estimated taxable income as the definition of the effective tax rate, the author develops a framework for reconciling effective and statutory rates. He also discusses the problems that certain items—taxes on nonrecurring income, taxes on earnings of unconsolidated subsidiaries, deferred tax provisions that may not reverse and investment tax credits—may create for the interpretation of effective rates.

Since a firm’s cash flow and earnings depend critically on its effective tax rate, analysis of a firm’s past effective rate can lead to a better understanding of the firm’s future cash flow and earnings. The kind of analysis described by the author can also be useful in determining whether apparent differences in firms’ effective tax rates reflect genuine competitive differences or mere differences in accounting.