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http://ssrn.com/abstract=629350
 
 

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Theft and Taxes


Mihir A. Desai


Harvard Business School - Finance Unit; National Bureau of Economic Research (NBER)

I. J. Alexander Dyck


University of Toronto - Rotman School of Management

Luigi Zingales


University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); University of Chicago - Polsky Center for Entrepreneurship; European Corporate Governance Institute (ECGI)

October 2005

ECGI - Finance Research Paper No. 63/2005
EFA 2005 Moscow Meetings, Forthcoming
CRSP Working Paper No. 600

Abstract:     
This paper analyzes the interaction between corporate taxes and corporate governance. We show that the design of the corporate tax system affects the amount of private benefits extracted 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 ensitivity of tax revenues to tax changes. When the corporate governance system is ineffective, a decrease in the tax rate can increase tax revenues. This corporate governance view of taxes provides a novel justification for the existence of a separate corporate tax based on profits. Tests of the corporate governance implications using Russian data provide evidence consistent with model implications. We test the tax implications in a panel of countries. Consistent with the model, we find that corporate tax rate increases have smaller effects on revenues when corporate governance is weaker.

Note: A previous version of this paper circulated under the title "Corporate Governance and Taxation"

Number of Pages in PDF File: 54

Keywords: Corporate finance, corporate governance, public finance, taxation, tax evasion, Russia

JEL Classification: G0, G3, G34, G38, H2, H26

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Date posted: December 6, 2005  

Suggested Citation

Desai, Mihir A. and Dyck, I. J. Alexander and Zingales, Luigi, Theft and Taxes (October 2005). ECGI - Finance Research Paper No. 63/2005; EFA 2005 Moscow Meetings, Forthcoming; CRSP Working Paper No. 600. Available at SSRN: http://ssrn.com/abstract=629350 or http://dx.doi.org/10.2139/ssrn.629350

Contact Information

Mihir A. Desai
Harvard Business School - Finance Unit ( email )
Boston, MA 02163
United States
617-495-6693 (Phone)
617-496-6592 (Fax)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
I.J. Alexander Dyck
University of Toronto - Rotman School of Management ( email )
105 St. George Street
Toronto, Ontario M5S 3E6
Canada
416-946-0819 (Phone)
Luigi Zingales (Contact Author)
University of Chicago - Booth School of Business ( email )
5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-702-3196 (Phone)
773-834-2081 (Fax)

Chicago Booth School of Business Logo

National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
University of Chicago - Polsky Center for Entrepreneurship
Chicago, IL 60637
United States
European Corporate Governance Institute (ECGI)
c/o ECARES ULB CP 114
B-1050 Brussels
Belgium
HOME PAGE: http://www.ecgi.org
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