Whats the difference between effective and cash tax rate? Why do you use the former to forecast earnings and the latter to forecast cash flow?
The effective tax rate is tax expense (income statement) divided by pre-tax income (EBT, income statement).
The cash tax rate is cash taxes paid (cash flow statement) divided by pre-tax income.
They’re different because of all of that wonderful junk you learned at Level I about deferred tax assets (DTAs) and deferred tax liabilities (DTLs).
Because earnings – net income – comes from the income statement, you use income statement accounts to project it.
Because cash flow comes from the cash flow statement, you use cash flow amounts to project it.