Corporate deductibility provisions and managerial incentives

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Using an agency model of firm behavior, the paper analyzes whether the cost of investment should be tax exempt. The findings suggest that, when managers engage in wasteful capital expenditures, welfare may decline if the cost of investment is tax deductible, as commonly advocated. The extent to which the return on investment should be taxed depends on how the internal provision of incentive pay and external monitoring by banks interact in constraining the manager and whether retained earnings or new share issues finance investments at the margin. The results are informative for the design of investment subsidies which might be integrated in corporate tax systems such as an Allowance for Corporate Equity or a cash-flow tax. Terms of use: Documents in EconStor mayJEL-Code: H250, D210.

Hosting Multinationals: Economic and Fiscal Implications

“…Chatagny, Koethenbuerger and Stimmelmayr (2014) assess the implications of different variants of a licence box solution through the use of a computable general equilibrium model. To quantify the incentives to engage in transfer pricing, Chatagny, they use transfer-pricing elasticity values ranging from -0.4 to -1.1.…”

“…See Keuschnigg and Ribi (2013) and Koethenbuerger and Stimmelmayr (2014) on the role of financial constraints and corporate governance issues in this context.…”

Taxation and agency conflicts between firm owners and managers: a review

“…41 In their model, the dividend tax rate simply reduces after-tax corporate profits from the shareholders' perspective and does not influence the manager's behavior. On the other hand, Koethenbuerger and Stimmelmayr (2014) argue that dividend taxation does indeed influence managerial behavior. They find that increasing the dividend tax has the same consequences as reducing managerial ownership.…”

“…We further extend the example to incorporate multiple tax types affecting both contracting parties. Researchers usually implement several tax types at the same time if they are interested in understanding the overall influence of taxation on optimal effort and contracting decisions, while accounting for interactions between tax types (e.g., Koethenbuerger and Stimmelmayr 2014). In the following, we implement wage taxes, s w , corporate income taxes, s c , and dividend taxes, s d .…”

“…This is demonstrated by Koethenbuerger and Stimmelmayr (2014) who consider interactions between taxes paid on corporate profits and taxes paid on shareholder dividends. In line with intuition, they find that higher corporate tax rates increase the value of deductibility provisions.…”