, Volume 7, Issue 4, pp 511-527
Date: 28 Apr 2009

The interaction between corporate tax structure and disclosure policy

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Abstract

When socially desirable behaviors are deemed difficult to legislate, tax code is often called upon to indirectly achieve the desired ends. Adjustments to tax policy have been employed to spark investment, encourage charitable donations, and discourage tobacco consumption, to name a few examples. This paper demonstrates that tax policy may also be an effective means of encouraging welfare enhancing disclosures by firms. Further, by inducing disclosures of the right types of information while discouraging revelation of other types, tax policy proves to be a more versatile instrument than direct regulatory attempts which can mandate (but not prohibit) disclosures. The intuition behind our results is that when firms make decisions to disclose (or withhold) pieces of private information, such a decision is often made with an eye on the potential for a large payoff. In such cases, progressive taxes can dampen the appeal of big payoffs and better align the incentives of firms with those of consumers. In short, while progressive taxes may be criticized for curbing aggressiveness, it is precisely such a decrease in aggressiveness that can prompt efficient sharing of information.

We thank Mark Bagnoli, Francesco Bova, Ron Dye, John Fellingham, Hans Frimor, Thomas Pfeiffer, Doug Schroeder, Shyam Sunder, Susan Watts, Lixin Ye, Dae-Hee Yoon, Rick Young, and an anonymous referee for helpful comments. Anil Arya gratefully acknowledges assistance from the John J. Gerlach Chair.