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
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)
ECGI - Finance Research Paper No. 63/2005
EFA 2005 Moscow Meetings, Forthcoming
CRSP Working Paper No. 600
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
Date posted: December 6, 2005