Theft and Taxes

54 Pages Posted: 6 Dec 2005  

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)

Multiple version iconThere are 3 versions of this paper

Date Written: October 2005

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.

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

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

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

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: https://ssrn.com/abstract=629350 or http://dx.doi.org/10.2139/ssrn.629350

Mihir A. Desai

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Harvard Business School - Finance Unit ( email )

Boston, MA 02163
United States
617-495-6693 (Phone)
617-496-6592 (Fax)

I.J. Alexander Dyck

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 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)

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

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