Asymmetric taxation, limited liability, and agency conflicts. (June 2021)

• Record Type: Journal Article
• Authors: Schneider, Georg; Scholze, Andreas; Meißner, Fabian
• Is Part Of: Management accounting research. Volume 51(2021)
• Publication Date: 2021-06
• Subjects: D86 -- H21 -- H25 -- M41; Asymmetric taxation -- Franchising -- Limited liability -- Moral hazard -- Partnerships -- Profit sharing; Managerial accounting -- Periodicals; Managerial accounting -- Research -- Periodicals; Managerial accounting -- Bibliography -- Periodicals; Comptabilité de gestion -- Périodiques; Comptabilité de gestion -- Recherche -- Périodiques; Comptabilité de gestion -- Bibliographie -- Périodiques; Managerial accounting; Managerial accounting -- Research; Bibliography; Periodicals; 658.1511
• DOI: 10.1016/j.mar.2021.100739
• Languages: English
• ISSNs: 1044-5005

Abstract

Abstract: Current income tax systems are characterized by an asymmetric treatment of gains and losses. This implies that the (effective) tax rate on profits exceeds that on losses. We study the contractural relationship between two parties (the principal and the agent). For example, such a relationship occurs if a franchisee (agent) contracts with a franchiser (principal) or when a new partner (agent) enters a partnership (principal). We focus on the effect of the agent's asymmetric taxation on the principal's optimal contract and show that the principal's expected profit is a non-monotonous function of the agent's loss tax rate. In particular, we show that the principal can be strictly better off if the agent is taxed more heavily. This result stands in contrast to the existing literature, which has only shown that lower taxation at the agent's level increases the principal's expected profit.