Theft and Taxes

Mihir A. Desai, Isaac Dyck and Luigi Zingales

No 10978, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper analyzes the interaction between corporate taxes and corporate governance. We show that the characteristics of a taxation system affect the extraction of private benefits 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 sensitivity of tax revenues to tax changes. When the corporate governance system is ineffective (i.e., when it is easy to divert income), an increase in the tax rate can reduce tax revenues. We test this prediction in a panel of countries. Consistent with the model, we find that corporate tax rate increases have smaller (in fact, negative) effects on revenues when corporate governance is weaker. Finally, this approach provides a novel justification for the existence of a separate corporate tax based on profits.

JEL-codes: G0 G1 G2 G3 (search for similar items in EconPapers)
Date: 2004-12
New Economics Papers: this item is included in nep-acc and nep-fin
Note: CF PE
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (14)

Published as Desai, Mihir, A. Dyck and L. Zingales. “Theft and Taxes.” Journal of Financial Economics 84, 3 (June 2007): 591-623.

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Journal Article: Theft and taxes (2007)
Working Paper: Theft and Taxes (2004)
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