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Theft and Taxes

  • Mihir A. Desai

    (Harvard University and NBER)

  • Alexander Dyck

    ()

    (University of Toronto)

  • Luigi Zingales

    (University of Chicago, NBER, and CEPR)

Registered author(s):

    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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    File URL: http://www-2.rotman.utoronto.ca/iib/ITP0501.pdf
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    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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    Web page: http://www-2.rotman.utoronto.ca/iib
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    1. Rafael LaPorta & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, . "Law and Finance," Working Paper 19451, Harvard University OpenScholar.
    2. Randall Morck, 2003. "Why Some Double Taxation Might Make Sense: The Special Case of Inter-corporate Dividends," NBER Working Papers 9651, National Bureau of Economic Research, Inc.
    3. Jason G. Cummins & Kevin A. Hassett & R. Glenn Hubbard, 1995. "Tax Reforms and Investment: A Cross-Country Comparison," NBER Working Papers 5232, National Bureau of Economic Research, Inc.
    4. Shleifer, Andrei & Wolfenzon, Daniel, 2002. "Investor protection and equity markets," Journal of Financial Economics, Elsevier, vol. 66(1), pages 3-27, October.
    5. Benjamin E. Hermalin & Michael S. Weisbach, 1996. "Endogenously Chosen Boards of Directors and Their Monitoring of the CEO," Microeconomics 9602001, EconWPA, revised 09 Oct 1996.
    6. Kevin A. Hassett, 1999. "Tax Policy and Investment," Books, American Enterprise Institute, number 53049, October.
    7. James R. Hines & Eric M. Rice, 1994. "Fiscal Paradise: Foreign Tax Havens and American Business," The Quarterly Journal of Economics, Oxford University Press, vol. 109(1), pages 149-182.
    8. Luigi Zingales, 1995. "Insider Ownership and the Decision to Go Public," Review of Economic Studies, Oxford University Press, vol. 62(3), pages 425-448.
    9. Douglas A. Irwin, 1997. "Higher Tariffs, Lower Revenues? Analyzing the Fiscal Aspects of the "Great Tariff Debate of 1888"," NBER Working Papers 6239, National Bureau of Economic Research, Inc.
    10. Jack Mintz, 1995. "Corporation tax: a survey," Fiscal Studies, Institute for Fiscal Studies, vol. 16(4), pages 23-68, November.
    11. Alexander Dyck & Luigi Zingales, 2004. "Private Benefits of Control: An International Comparison," Journal of Finance, American Finance Association, vol. 59(2), pages 537-600, 04.
    12. Mihir Desai & Dhammika Dharmapala, . "Corporate Tax Avoidance and High Powered Incentives," American Law & Economics Association Annual Meetings 1006, American Law & Economics Association.
    13. International Monetary Fund, 2002. "Russian Federation; Selected Issues," IMF Staff Country Reports 02/75, International Monetary Fund.
    14. Andrei Shleifer & Robert W. Vishny, 1995. "A Survey of Corporate Governance," Harvard Institute of Economic Research Working Papers 1741, Harvard - Institute of Economic Research.
    15. 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.
    16. John R. Graham, 2003. "Taxes and Corporate Finance: A Review," Review of Financial Studies, Society for Financial Studies, vol. 16(4), pages 1075-1129.
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