COSTS OF MONITORING AND CORPORATE-TAXATION

A new approach to understanding the real effects of corporate taxation is suggested. Essentially, by claiming that corporate debt means discipline for the executives, the debt policy of a firm is endogenised. It is then proved that the effective profits tax rate is tied to current and expected future profitability, reflected in the marginal valuation of equity. A theoretically correct effective marginal profits tax rate cannot be estimated from historical figures. Moreover, a new tax neutrality result in suggested. For the first time, the paper provides a choice-theoretical explanation for corporations in the Nordic countries having quite systematically chosen to abstain from maximising their interest-free tax debt capacity.