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Profit-Based Compensation and Corporate Tax Evasion

Author

Listed:
  • Jing Jun Chang

    () (Department of Taxation and Finance, National Taichung Institute of Technology, Taiwan)

Abstract

This paper attempts to analyze corporate tax evasion in a principal-agent framework. We assume that the firm's profit is positively related to managerial effort and that the executive compensation is profit-based. In addition, we consider the situation where the manager might underreport the firm's earnings to the shareholders or to the tax authorities and consume the unreported income as rent when the manager possesses private information regarding the firm's earnings. We show that, under these considerations, the production decision and tax evasion decision are not separable; moreover, the profit taxes are not neutral.

Suggested Citation

  • Jing Jun Chang, 2011. "Profit-Based Compensation and Corporate Tax Evasion," Journal of Economics and Management, College of Business, Feng Chia University, Taiwan, vol. 7(2), pages 185-198, July.
  • Handle: RePEc:jec:journl:v:7:y:2011:i:2:p:185-198
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    More about this item

    Keywords

    profit-based compensation; the neutrality of profit taxes; tax evasion;

    JEL classification:

    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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