[leonardjustin]

Generally, tax timing differences are accounted for in the effective tax rate, while permanent tax differences are accounted for in the balance sheet, right? (as opposed to the other way around)

[ArcSine]

I'd say it's the other way 'round. Timing diffs give rise to deferred tax assets and liabilities on the balance sheet -- they are a result of reporting income and/or deductions in different years for book purposes vs. tax purposes.

Permanent diffs, though, create an effective tax rate that's different than the actual tax rate. Suppose, e.g. that every year I have net profits of $100, the tax rate is 5%, and every year my profits include $20 of municipal bond interest.

Thus my taxable income is 80 bucks each year, and ergo my annual tax bill is $4. This gives me an effective tax rate of 4% on my total net income.