Corporate Taxation and Corporate Governance

35 Pages Posted: 10 Jan 2010  

Marko Koethenbuerger

ETH Zurich - Department of Management, Technology and Economics; KOF Swiss Economic Institute; CESifo (Center for Economic Studies and Ifo Institute)

Michael Stimmelmayr

ETH Zürich - Department of Management, Technology, and Economics (D-MTEC); CESifo (Center for Economic Studies and Ifo Institute)

Date Written: December 2009

Abstract

The effects of corporate taxation on firm behavior have been extensively discussed in the neoclassical model of firm behavior which abstracts from agency problems. As emphasized by the corporate governance literature, corporate investment behavior is however crucially influenced by diverging interests between shareholders and managers. We set up an agency model and analyze the crucial issue in corporate taxation of whether the normal return on investment should be exempted from taxation. The findings suggest that the divergence of interests may be intensified and welfare reduced if the corporate tax system exempts the normal return on investment from taxation. The optimal system may well use the full return on investment as a tax base. Hence, tax systems such as an Allowance for Corporate Equity (ACE) or a Cash-flow tax do not have the familiar efficiency-enhancing effects in the presence of corporate agency problems.

Keywords: corporate taxation, corporate governance, allowance for corporate equity, comprehensive business income tax, cash flow tax

JEL Classification: H25, D21

Suggested Citation

Koethenbuerger, Marko and Stimmelmayr, Michael, Corporate Taxation and Corporate Governance (December 2009). CESifo Working Paper Series No. 2881. Available at SSRN: https://ssrn.com/abstract=1532685

Marko Koethenbuerger

ETH Zurich - Department of Management, Technology and Economics ( email )

Weinbergstrasse 35
Zurich, 8092
Switzerland
+41 44 6325446 (Phone)

KOF Swiss Economic Institute ( email )

Zurich
Switzerland

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Michael Stimmelmayr (Contact Author)

ETH Zürich - Department of Management, Technology, and Economics (D-MTEC) ( email )

ETH-Zentrum
Zurich, CH-8092
United States

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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