CEO Taxation

• Applicant: Professor Dr. Johannes Voget
• Subject Area: Economic Policy, Applied Economics
• Term: since 2019
• Project identifier: Deutsche Forschungsgemeinschaft (DFG) - Project number 388587616

The literature on the taxation of multinational corporations largely neglects the role of executives' tax incentives and how they interact with firm level outcomes. In the current funding phase, we address this topic and analyse the effects of higher executive taxation on CEO and firm performance, on the mobility of executives, and whether it distorts – in conjunction with repatriation taxes – multinational corporations’ allocation of funds available for compensation, payout, and investment. As we find substantial effects on firm performance, we will focus on potential implications for the firms’ employees and host locations in the second funding phase. Hence, we will investigate whether changes in executive taxation impact i) rent-distribution within firms, ii) headquarter location decisions, iii) the extent of labor violations occurring. The first project complements our work on CEOs and firm performance shifting our focus on the question how taxes affect the rent distribution at the firm-level. First, , we investigate how higher personal income taxes affect the distribution of rents in multinational corporations. We exploit gains from trade as an exogenous change in the rent and assess whether the way these gains are distributed to shareholders, employees or the executive is impacted by the tax rate of the manager. Second, we assess who bears the burden of an increase in corporate taxes caused by the repeal of the deductibility of performance-based executive compensation by the Tax Cuts and Jobs Act. The second project investigates another decision margin which may be affected by the executive’s tax rates: headquarter location. Prior work has shown that firms change the location of their headquarters in response to higher corporate taxes. However, the role that executives play in the decision where to locate the firm’s headquarters has largely been unaddressed. For identification we rely on differences in the exposure to changes in the capital gains and income tax rate caused by differences in CEO wealth and compensation. If executive taxes influence the location of headquarters we can also investigate the externality of headquarters on the local economy. Finally, the last project assesses how executive taxes affect working conditions. There are two channels through which executive taxes could affect working conditions. On the one hand higher executive taxes have been shown to reduce firm performance and decrease investments in capital. On the other hand, higher executive taxes should reduce the manager’s payoff from unpleasant actions such as pressuring workers to perform well. This could then lead to a reduction in the pressure exerted on workers and consequently fewer safety violations. We employ the performance-sensitivity of manager pay to assess the effect of the manager’s performance pressure on safety violations.

• DFG Programme: Research Units
• Subproject of: FOR 2738: Understanding the Behaviour of Multinational Corporations in the Context of International Tax Institutions
• Co-Investigator: Professor Dr. Martin Ruf