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

See all articles by Ronald W. Spahr

Ronald W. Spahr

University of Memphis - Finance

Pankaj K. Jain

University of Memphis - Fogelman College of Business and Economics

Fariz Huseynov

North Dakota State University - College of Business

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Date Written: May 11, 2008

Abstract

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

Suggested Citation

Spahr, Ronald W. and Jain, Pankaj K. and Huseynov, Fariz, The Income Tax Structure's Impact on Growth, Valuation, and Global Investments: A Three Stakeholder Perspective (May 11, 2008). Available at SSRN: https://ssrn.com/abstract=891372 or http://dx.doi.org/10.2139/ssrn.891372

Ronald W. Spahr

University of Memphis - Finance ( email )

United States

Pankaj K. Jain (Contact Author)

University of Memphis - Fogelman College of Business and Economics ( email )

Memphis, TN 38152
United States

Fariz Huseynov

North Dakota State University - College of Business ( email )

Department of Acctg, Finance & Information Systems
Fargo, ND 58108
United States
+17012315074 (Phone)

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