We do not use the actual tax paid to estimate future tax expense because the actual tax paid will be materially different due to one or more of the following reasons.
- The taxes paid accounts for the deductions and deferred tax provisions that apply to a company’s net income. The deferred tax benefits and costs reverse over time.
- The taxes paid is lower than effective operating tax liability when a company has debt due to the debt tax shields. This will double count the benefit of tax shields if we also incorporate the tax shield benefits in our discount rate.