The importance of reporting conventions for the theory of corporate taxation

Kanniainen, Vesa; Södersten, Jan

doi:10.1016/0047-2727(95)80004-s

Cited by 29 publications

(24 citation statements)

References 12 publications

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“…"Twobook" countries (such as Canada, the United Kingdom, Ireland, Australia, New Zealand, and the Netherlands) keep the books largely separate. Kanniainen and Sodersten (1995) show that uniform reporting in combination with the legal requirement to pay dividends out of after-tax book income implies that dividends cannot exceed after-tax taxable profits. On the other hand, under separate reporting [studied by, for example, Sinn (1987)], dividends may not exceed after-tax economic profits reduced by the tax savings resulting from accelerated depreciation.…”

Section: Copyright Mohr Siebeckmentioning

confidence: 99%

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Corporate Financial Dynamics: A Pecking-Order Approach

Shahnazarian¹

2005

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This paper shows that combining an upper constraint on dividends, a lower constraint on dividends due to shareholder preferences, and an interest rate that increases with the debt ratio leads to a pecking-order financial structure: A typical firm will start to finance a new investment by issuing new shares in combination with debt, then grow by financing its investments with retained earnings and borrowing, and eventually stop growing and distribute all profits. Repurchases of shares will speed up this growth path. Economic depreciation may make the firm want to stop the decline in its capital stock earlier.

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Section: Copyright Mohr Siebeckmentioning

confidence: 99%

“…Most importantly, we explicitly explore the implications of a tax system that implies a tax advantage for debt, which dates back to Miller (1977). Kanniainen and Sodersten (1995) impose a legal requirement to pay dividends from after-tax book income. King (1974) was one of the first to introduce a dividend constraint on firms.…”

Section: Introductionmentioning

confidence: 99%

Corporate Financial Dynamics: A Pecking-Order Approach

Shahnazarian¹

2005

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“…This is because, as argued by Kanniainen and Södersten (1995), resources constrained in provisions for deferred taxes represent an interest-free loan from the government: hence, …rms …nancing investment by debt can exploit this interest-free borrowing opportunity, as measured by the second term on the right-hand side of equation (23). As for the case of new equity …nance, it is straightforward to show that a change in the capital allowance has a much smaller e¤ect on the debt component of the user cost of capital than that predicted under the standard theory since…”

Section: Constrained Emtrmentioning

confidence: 99%

“…As stated by Kanniainen and Södersten (1995), the positive (negative) temporary di¤erence between the capital allowance and the rate of depreciation represents a deferred tax liability (asset) which must be retained by the …rm rather than be distributed to shareholders. In principle, the constrained liquidity should be used to carry out new investment.…”

Section: Constrained Emtrmentioning

confidence: 99%

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Up or Down? Capital Income Taxation in the United States and the United Kingdom

2012

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Empirical evidence suggests that the E¤ective Marginal Tax Rate (EMTR) on income from capital has increased considerably in both the United States and the United Kingdom over the period . This evidence contradicts the corporate tax literature which predicts that the EMTR should instead fall over time as a result of increasing international capital mobility and higher tax competition between governments. This paper argues that this inconsistency is entirely due to the fact that EMTRs on income from capital are currently computed from versions of the neoclassical investment model which do not take into account …nancial constraints on dividend policy faced by …rms investing in both the United States and the United Kingdom. The paper incorporates …nancial constraints on dividend policy into the analytical framework for the computation of the EMTR and employs the new model to re-calculate time series of the EMTRs in both countries. The new empirical results show that, in contrast to the existing evidence, the EMTR on investment …nanced by either retained earnings or new equity has indeed declined over time in both countries, while the EMTR on debt-…nanced investment has remained relatively stable.

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