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Asymmetric Taxation and Performance-Based Incentive Contracts

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  • Rainer Niemann
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    Abstract

    This paper analyzes the effects of symmetric and asymmetric taxation on performance-based versus fixed remuneration contracts. I integrate a proportional corporation tax and a proportional wage tax into a binary principal-agent model. The wage tax increases the remuneration costs and makes the agent's employment less attractive. Thus, the principal tends to demand lower rather than higher effort or does not offer a contract at all. In contrast to the wage tax, the corporate tax is irrelevant for the optimal remuneration contract. Under asymmetric corporate taxation, the principal tends to offer contracts less frequently. Fixed remuneration contracts are penalized more heavily by asymmetric taxation than performance-based remuneration contracts.

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    File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2011/wp-cesifo-2011-02/cesifo1_wp3363.pdf
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    Bibliographic Info

    Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3363.

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    Date of creation: 2011
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    Handle: RePEc:ces:ceswps:_3363

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    Related research

    Keywords: asymmetric taxation; loss-offset; principal-agent theory; corporate taxation; wage taxation;

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    References

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    1. Ahsan, Syed M, 1974. "Progression and Risk-Taking," Oxford Economic Papers, Oxford University Press, vol. 26(3), pages 318-28, November.
    2. Brunello, Giorgio & Comi, Simona & Sonedda, Daniela, 2006. "Income Taxes and the Composition of Pay," IZA Discussion Papers 2203, Institute for the Study of Labor (IZA).
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    4. Macho-Stadler, Ines & Perez-Castrillo, J. David, 2001. "An Introduction to the Economics of Information: Incentives and Contracts," OUP Catalogue, Oxford University Press, edition 2, number 9780199243259.
    5. van Wijnbergen, Sweder & Estache, Antonio, 1999. "Evaluating the minimum asset tax on corporations: an option pricing approach," Journal of Public Economics, Elsevier, vol. 71(1), pages 75-96, January.
    6. Rainer Niemann, 2004. "Asymmetric Taxation and Cross-Border Investment Decisions," CESifo Working Paper Series 1219, CESifo Group Munich.
    7. Paolo Panteghini, 2000. "On Corporate Tax Asymmetries and Neutrality," CESifo Working Paper Series 276, CESifo Group Munich.
    8. Saman Majd & Stewart C. Myers, 1986. "Tax Asymmetries and Corporate Income Tax Reform," NBER Working Papers 1924, National Bureau of Economic Research, Inc.
    9. Paolo M. Panteghini, 2001. "Corporate Tax Asymmetries under Investment Irreversibility," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 58(3), pages 207-, July.
    10. Eeckhoudt, L. & Gollier, C. & Schlesinger, H., 1996. "The No Loss Offset Provision and the Attitude Towards Risk of a Risk-Neutral Firm," Papers 96.409, Toulouse - GREMAQ.
    11. Kanniainen, Vesa, 2000. "Empire building by corporate managers:: the corporation as a savings instrument," Journal of Economic Dynamics and Control, Elsevier, vol. 24(1), pages 127-142, January.
    12. Mackie-Mason, Jeffrey K., 1990. "Some nonlinear tax effects on asset values and investment decisions under uncertainty," Journal of Public Economics, Elsevier, vol. 42(3), pages 301-327, August.
    13. Ralf Ewert & Rainer Niemann, 2010. "Limited Liability, Asymmetric Taxation, and Risk Taking - Why Partial Tax Neutralities can be Harmful," CESifo Working Paper Series 3301, CESifo Group Munich.
    14. Banerjee, Anindya & Besley, Timothy, 1990. "Moral Hazard, Limited Liability and Taxation: A Principal-Agent Model," Oxford Economic Papers, Oxford University Press, vol. 42(1), pages 46-60, January.
    15. Vesa Kanniainen, 1999. "Failures in Corporate Governance: Can the Corporation Tax Improve Efficiency?," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 56(3/4), pages 310-, July.
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    Cited by:
    1. Voßmerbäumer, Jan, 2012. "Effizienzwirkungen einer Regulierung von Managergehältern durch das Steuerrecht," arqus Discussion Papers in Quantitative Tax Research 125, arqus - Arbeitskreis Quantitative Steuerlehre.

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