Personal taxation, corporate agency costs and firm performance

Abstract

This paper investigates the effect of personal-tax progressivity on management performance and agency costs by examining measures of corporate operating efficiency. We study a sample of USbased manufacturing and service firms and variations in across-state tax policy. Using matched-pair testing and regression analysis, we find evidence consistent with the hypothesis that increased personal-tax progressivity negatively impacts management productivity and is manifested in reduced firm efficiency. We control for several other factors that the literature suggests is relevant to firm operating efficiency and find that our results are robust.