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Theft and Taxes

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Author Info

  • Mihir A. Desai

    (Harvard University and NBER)

  • Alexander Dyck

    ()
    (University of Toronto)

  • Luigi Zingales

    (University of Chicago, NBER, and CEPR)

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 International Tax Program, Institute for International Business, Joseph L. Rotman School of Management, University of Toronto in its series International Tax Program Papers with number 0501.

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Length: 47 pages
Date of creation: Mar 2003
Date of revision: Dec 2004
Handle: RePEc:ttp:itpwps:0501

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Keywords: Corporate Tax; Corporate governance;

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References

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