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 disc ipline for the executives, the debt policy of a firm is endogenised. I t is then proved that the effective profits tax rate is tied to curren t and expected future profitability, reflected in the marginal valuati on of equity. A theoretically correct effective marginal profits tax r ate cannot be estimated from historical figures. Moreover, a new tax n eutrality result in suggested. For the first time, the paper provides a choice-theoretical explanation for corporations in the Nordic countr ies having quite systematically chosen to abstain from maximising thei r interest-free tax debt capacity.