Profit-Based Compensation and Corporate Tax Evasion

Jing Jun Chang ()
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Jing Jun Chang: Department of Taxation and Finance, National Taichung Institute of Technology, Taiwan

Journal of Economics and Management, 2011, vol. 7, issue 2, 185-198

Abstract: This paper attempts to analyze corporate tax evasion in a principal-agent framework. We assume that the firm's profit is positively related to managerial effort and that the executive compensation is profit-based. In addition, we consider the situation where the manager might underreport the firm's earnings to the shareholders or to the tax authorities and consume the unreported income as rent when the manager possesses private information regarding the firm's earnings. We show that, under these considerations, the production decision and tax evasion decision are not separable; moreover, the profit taxes are not neutral.

Keywords: profit-based compensation; the neutrality of profit taxes; tax evasion (search for similar items in EconPapers)
JEL-codes: D86 G34 H21 (search for similar items in EconPapers)
Date: 2011
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Persistent link: https://EconPapers.repec.org/RePEc:jec:journl:v:7:y:2011:i:2:p:185-198

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