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Theft and Taxes

  • Desai, Mihir
  • Dyck, Alexander
  • Zingales, Luigi

This Paper analyses 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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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4816.

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Date of creation: Dec 2004
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Handle: RePEc:cpr:ceprdp:4816
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  1. Desai, Mihir A. & Dyck, Alexander & Zingales, Luigi, 2007. "Theft and taxes," Journal of Financial Economics, Elsevier, vol. 84(3), pages 591-623, June.
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  13. Rafael La Porta & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, 1998. "Law and Finance," Journal of Political Economy, University of Chicago Press, vol. 106(6), pages 1113-1155, December.
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  18. Austan Goolsbee, 1999. "Evidence on the High-Income Laffer Curve from Six Decades of Tax Reform," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 30(2), pages 1-64.
  19. Joel Slemrod & Shlomo Yitzhaki, 2000. "Tax Avoidance, Evasion, and Administration," NBER Working Papers 7473, National Bureau of Economic Research, Inc.
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  22. Zingales, Luigi, 1994. "The Value of the Voting Right: A Study of the Milan Stock Exchange Experience," Review of Financial Studies, Society for Financial Studies, vol. 7(1), pages 125-48.
  23. Rafael La Porta & Florencio Lopez-de-Silane & Andrei Shleifer, 1998. "Corporate Ownership Around the World," NBER Working Papers 6625, National Bureau of Economic Research, Inc.
  24. Shleifer, Andrei & Vishny, Robert W, 1997. " A Survey of Corporate Governance," Journal of Finance, American Finance Association, vol. 52(2), pages 737-83, June.
  25. John R. Graham, 2003. "Taxes and Corporate Finance: A Review," Review of Financial Studies, Society for Financial Studies, vol. 16(4), pages 1075-1129.
  26. Oliver E. Williamson, 2000. "The New Institutional Economics: Taking Stock, Looking Ahead," Journal of Economic Literature, American Economic Association, vol. 38(3), pages 595-613, September.
  27. Jack Mintz, 1995. "Corporation tax: a survey," Fiscal Studies, Institute for Fiscal Studies, vol. 16(4), pages 23-68, November.
  28. Slemrod, Joel, 2004. "Are corporate tax rates, or countries, converging?," Journal of Public Economics, Elsevier, vol. 88(6), pages 1169-1186, June.
  29. International Monetary Fund, 2002. "Russian Federation; Selected Issues and Statistical Appendix," IMF Staff Country Reports 02/75, International Monetary Fund.
  30. Christie, William G & Nanda, Vikram, 1994. " Free Cash Flow, Shareholder Value, and the Undistributed Profits Tax of 1936 and 1937," Journal of Finance, American Finance Association, vol. 49(5), pages 1727-54, December.
  31. Zingales, Luigi, 1995. "What Determines the Value of Corporate Votes?," The Quarterly Journal of Economics, MIT Press, vol. 110(4), pages 1047-73, November.
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