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Corporate Taxation and Corporate Governance

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  • Marko Köthenbürger
  • Michael Stimmelmayr

Abstract

The effects of corporate taxation on firm behavior have been extensively discussed in the neoclassical model of firm behavior which abstracts from agency problems. As emphasized by the corporate governance literature, corporate investment behavior is however crucially influenced by diverging interests between shareholders and managers. We set up an agency model and analyze the crucial issue in corporate taxation of whether the normal return on investment should be exempted from taxation. The findings suggest that the divergence of interests may be intensified and welfare reduced if the corporate tax system exempts the normal return on investment from taxation. The optimal system may well use the full return on investment as a tax base. Hence, tax systems such as an Allowance for Corporate Equity (ACE) or a Cash-flow tax do not have the familiar efficiency-enhancing effects in the presence of corporate agency problems.

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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2881.

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Date of creation: 2009
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Handle: RePEc:ces:ceswps:_2881

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Related research

Keywords: corporate taxation; corporate governance; allowance for corporate equity; comprehensive business income tax; cash flow tax;

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References

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Citations

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Cited by:
  1. Ruud de Mooij & M.P. Devereux, 2009. "An applied analysis of ACE and CBIT reform in the EU," CPB Discussion Paper, CPB Netherlands Bureau for Economic Policy Analysis 128, CPB Netherlands Bureau for Economic Policy Analysis.
  2. Keuschnigg, Christian & Ribi, Evelyn, 2010. "Profit Taxation, Innovation and the Financing of Heterogeneous Firms," CEPR Discussion Papers, C.E.P.R. Discussion Papers 7626, C.E.P.R. Discussion Papers.
  3. Michael P. Devereux, 2012. "Issues in the Design of Taxes on Corporate Profit," Working Papers, Oxford University Centre for Business Taxation 1215, Oxford University Centre for Business Taxation.
  4. Christian Keuschnigg & Evelyn Ribi, 2013. "Profit taxes and financing constraints," International Tax and Public Finance, Springer, Springer, vol. 20(5), pages 808-826, October.

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