Corporate Taxation and Corporate Governance
Final Report Abstract
Public finance economists have intensively discussed the distortionary effects of taxation but they have frequently ignored the possibility of agency problems in their analyses. Vice versa, the agency problems associated with corporate governance have been predominantly analysed by business and financial economists, who mostly abstract from taxes. Consequently, the link between taxation and corporate governance has been widely neglected until recently. Therefore the research project "Corporate Taxation and Corporate Governance" has the aim to extend the existing knowledge about how corporate and capital income taxes interact with corporate governance, i.e. the agency problem between division managers and headquarters or managers and shareholders, in general. The results derived so far indicate that the understanding of the interplay between tax incentives and managerial behaviour has important implications for actual tax policy as managerial resource dissipation harms firm productivity in various ways and therewith economic growth. As a consequence, several tax provisions which have been considered as efficiency enhancing in the neoclassical model might turn out to be less favourable if a conflict of interest between managers and shareholders is considered. This is particularly true for generous deductibility provisions which tend to increase aggregate investment, but not necessarily overall welfare. An optimal tax system may not include deductibility provisions and may use the full return on investment as the tax base when an agency conflict between managers and shareholders exists.
