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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)

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. International Monetary Fund, 2002. "Russian Federation; Selected Issues and Statistical Appendix," IMF Staff Country Reports 02/75, International Monetary Fund.
  2. Auerbach, Alan J., 2002. "Taxation and corporate financial policy," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 3, chapter 19, pages 1251-1292 Elsevier.
  3. 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.
  4. Desai, Mihir A. & Dharmapala, Dhammika, 2006. "Corporate tax avoidance and high-powered incentives," Journal of Financial Economics, Elsevier, vol. 79(1), pages 145-179, January.
  5. Enrico C. Perotti & Ernst-Ludwig von Thadden, 2006. "The Political Economy of Corporate Control and Labor Rents," Journal of Political Economy, University of Chicago Press, vol. 114(1), pages 145-174, February.
  6. La Porta, Rafael & Lopez-de-Silanes, Florencio & Shleifer, Andrei & Vishny, Robert W., 1998. "Law and Finance," Scholarly Articles 3451310, Harvard University Department of Economics.
  7. Kevin A. Hassett, 1999. "Tax Policy and Investment," Books, American Enterprise Institute, number 53049, 3.
  8. Alexander Dyck & Luigi Zingales, 2002. "Private Benefits of Control: An International Comparison," NBER Working Papers 8711, National Bureau of Economic Research, Inc.
  9. Andrei Shleifer & Daniel Wolfenson, 2000. "Investor Protection and Equity Markets," NBER Working Papers 7974, National Bureau of Economic Research, Inc.
  10. 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.
  11. Slemrod, Joel, 2004. "Are corporate tax rates, or countries, converging?," Journal of Public Economics, Elsevier, vol. 88(6), pages 1169-1186, June.
  12. 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.
  13. Marco Pagano & Paolo Volpin, 1999. "The Political Economy of Corporate Governance," CSEF Working Papers 29, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy, revised 01 Jul 2005.
  14. Rafael La Porta & Florencio Lopez-De-Silanes & Andrei Shleifer, 1999. "Corporate Ownership Around the World," Journal of Finance, American Finance Association, vol. 54(2), pages 471-517, 04.
  15. Jack Mintz, 1995. "Corporation tax: a survey," Fiscal Studies, Institute for Fiscal Studies, vol. 16(4), pages 23-68, November.
  16. 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.
  17. 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.
  18. 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.
  19. Andrei Shleifer & Robert W. Vishny, 1996. "A Survey of Corporate Governance," NBER Working Papers 5554, National Bureau of Economic Research, Inc.
  20. Hines, J.R. & Rice, E.M., 1990. "Fiscal Paradise: Foreign Tax Havens And American Business," Papers 56, Princeton, Woodrow Wilson School - Discussion Paper.
  21. repec:ner:tilbur:urn:nbn:nl:ui:12-3125517 is not listed on IDEAS
  22. Mihir A. Desai & Alexander Dyck & Luigi Zingales, 2004. "Theft and Taxes," NBER Working Papers 10978, National Bureau of Economic Research, Inc.
  23. Zingales, Luigi, 1995. "Insider Ownership and the Decision to Go Public," Review of Economic Studies, Wiley Blackwell, vol. 62(3), pages 425-48, July.
  24. Lenter, David & Slemrod, Joel & Shackelford, Douglas A., 2003. "Public Disclosure of Corporate Tax Return Information: Accounting, Economics, and Legal Perspectives," National Tax Journal, National Tax Association, vol. 56(4), pages 803-30, December.
  25. William Goetzmann & Matthew Spiegel & Andrey Ukhov, 2002. "Modeling and Measuring Russian Corporate Governance: The Case of Russian Preferred and Common Shares (English Version)," Yale School of Management Working Papers ysm278, Yale School of Management, revised 01 Oct 2002.
  26. Morck, Randall & Shleifer, Andrei & Vishny, Robert W., 1988. "Management ownership and market valuation : An empirical analysis," Journal of Financial Economics, Elsevier, vol. 20(1-2), pages 293-315, January.
  27. Daron Acemoglu, 2003. "The Form of Property Rights: Oligarchic vs. Democratic Societies," NBER Working Papers 10037, National Bureau of Economic Research, Inc.
  28. 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.
  29. 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.
  30. Zingales, Luigi, 1995. "What Determines the Value of Corporate Votes?," The Quarterly Journal of Economics, MIT Press, vol. 110(4), pages 1047-73, November.
  31. Slemrod, Joel & Yitzhaki, Shlomo, 2002. "Tax avoidance, evasion, and administration," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 3, chapter 22, pages 1423-1470 Elsevier.
  32. 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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