The Income Tax Structure's Impact on Growth, Valuation, and Global Investments: A Three Stakeholder Perspective
47 Pages Posted: 17 Mar 2006 Last revised: 19 Oct 2014
Date Written: May 11, 2008
We extend Modigliani and Miller's value conserving capital structure model by adding government as the third major financial stakeholder, through collection of taxes. We demonstrate that the burden of corporate taxation eventually falls on shareowners. By shifting the tax incidence to individuals, government's tax revenues rise despite its declining proportional stake in firms. Our empirical analysis of 108 countries during 1991 to 2004 finds that a 1% increase in corporate tax results in 0.2% decrease in growth rate, 2% decrease in valuation and 0.3% decrease in investment. The effect of personal taxes is much less significant.
Keywords: Tax, capital structure, government, stakeholder, growth
JEL Classification: E62, H2, H21, K34
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