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Theft and Taxes

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  • Mihir A. Desai
  • Alexander Dyck
  • Luigi Zingales

Abstract

This paper analyzes the interaction between corporate taxes and corporate governance. We show that the characteristics of a taxation system affect the extraction of private benefits by company insiders. A higher tax rate increases the amount of income insiders divert and thus worsens governance outcomes. In contrast, stronger tax enforcement reduces diversion and, in so doing, can raise the stock market value of a company in spite of the increase in the tax burden. We also show that the corporate governance system affects the level of tax revenues and the sensitivity of tax revenues to tax changes. When the corporate governance system is ineffective (i.e., when it is easy to divert income), an increase in the tax rate can reduce tax revenues. We test this prediction in a panel of countries. Consistent with the model, we find that corporate tax rate increases have smaller (in fact, negative) effects on revenues when corporate governance is weaker. Finally, this approach provides a novel justification for the existence of a separate corporate tax based on profits.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 10978.

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Date of creation: Dec 2004
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Publication status: published as Desai, Mihir, A. Dyck and L. Zingales. “Theft and Taxes.” Journal of Financial Economics 84, 3 (June 2007): 591-623.
Handle: RePEc:nbr:nberwo:10978

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