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Tax policy and macro-finance in a competitive global economy where government is considered as firms' third financial stakeholder

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  • Ronald W. Spahr
  • Pankaj K. Jain
  • Fariz Huseynov
  • Bhavik Rajesh Parikh

Abstract

Domestic tax policies must provide needed revenues for public infrastructure and social programs and must be structured to promote sustainable, growing, vibrant economies where individual rights and living standards are preserved or improved. We propose a macro-financial model be included with traditional financial macroeconomic theory postulating that, among other things, economic activity results from net international trade, inter-country capital flows, aggregate effects of all domestic private and public saving and investment and consumption decisions. We modify Modigliani and Miller's capital structure propositions (Modigliani and Miller, 1958, 1963) by adding government as the third major financial stakeholder where government possesses a stake in the firm because of the potential, just as stockholders, to receive future cash flows. We posit a 'conservation of value' where capital structure and the domestic tax structure have no effect on total firm value; however, affect relative stakeholder values, discount rates, capital investment and flow of capital into and out of a country.

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Bibliographic Info

Article provided by Inderscience Enterprises Ltd in its journal Global Business and Economics Review.

Volume (Year): 14 (2012)
Issue (Month): 1/2 ()
Pages: 30-66

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Handle: RePEc:ids:gbusec:v:14:y:2012:i:1/2:p:30-66

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Web page: http://www.inderscience.com/browse/index.php?journalID=168

Related research

Keywords: tax structure; capital structure; government; financial stakeholders; growth; tax policy; macrofinance; macroeconomic theory; stakeholder values; discount rates; capital investment; capital flow.;

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  1. Myers, Stewart C, 1984. " The Capital Structure Puzzle," Journal of Finance, American Finance Association, vol. 39(3), pages 575-92, July.
  2. Robert A. Taggart & Jr., 1991. "Consistent valuation and Cost of Capital Expressions With Corporate and Personal Taxes," Financial Management, Financial Management Association, vol. 20(3), Fall.
  3. Stewart C. Myers, 1984. "Capital Structure Puzzle," NBER Working Papers 1393, National Bureau of Economic Research, Inc.
  4. Merton H. Miller & Franco Modigliani, 1961. "Dividend Policy, Growth, and the Valuation of Shares," The Journal of Business, University of Chicago Press, vol. 34, pages 411.
  5. Stiglitz, Joseph E., 1973. "Taxation, corporate financial policy, and the cost of capital," Journal of Public Economics, Elsevier, vol. 2(1), pages 1-34, February.
  6. Dan Galai & Zvi Wiener, 2003. "Government Support of Investment Projects in the Private Sector: A Microeconomic Approach," Financial Management, Financial Management Association, vol. 32(3), Fall.
  7. Andrew Caplin & John Leahy, 2004. "The Social Discount Rate," Journal of Political Economy, University of Chicago Press, vol. 112(6), pages 1257-1268, December.
  8. Fama, Eugene F., 1977. "Risk-adjusted discount rates and capital budgeting under uncertainty," Journal of Financial Economics, Elsevier, vol. 5(1), pages 3-24, August.
  9. Frank Richter, 2004. "Valuation With Or Without Personal Income Taxes?," Schmalenbach Business Review (sbr), LMU Munich School of Management, vol. 56(1), pages 20-45, January.
  10. Mario Massari & Francesco Roncaglio & Laura Zanetti, 2008. "On the Equivalence between the APV and the "wacc" Approach in a Growing Leveraged Firm," European Financial Management, European Financial Management Association, vol. 14(1), pages 152-162.
  11. Myers, Stewart C., 1984. "Capital structure puzzle," Working papers 1548-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  12. Saman Majd & Stewart C. Myers, 1985. "Valuing the Government's Tax Claim on Risky Corporate Assets," NBER Working Papers 1553, National Bureau of Economic Research, Inc.
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