Reexamination of the Implicit Tax Hypothesis on the Corporate Sector
Asian Tax Journal Vol. 8 No. 4 (2007), pp. 39-67
Abstract
This study reexamines the implicit tax hypothesis on Korean corporations discussed in previous studies. Some of the flaws found in those studies are then complemented for a comprehensive examination. Specifically, our study is broken down as follows：First, the research model we propose includes risk control variables, estimators through Fama and Frenches' 3－factors model executions, to adjust the risk differences of sampled corporations. Second, we measure tax subsidy based on the actual data of tax filings. Third, we construct the time－lag model to reflect the timing differences of tax subsidies and implicit tax realization. Finally, our model includes various control variables that reflect market and company characteristics. The empirical results, using firms listed in KSE during 1999 to 2002, show that tax subsidies have negatively correlated with the change of pre－tax income from the time realized tax subsidy (t＋1) up to 5 years (t＋5). This result indicates that the implicit tax hypothesis is supported in Korean corporations. The same result was shown when we measured the tax subsidy by ‘Business Rationalization Reserve’ and we substituted the independent variables of pre－tax returns to ‘Operating Earning Rates’.This study shows that the implicit tax hypothesis on Korean corporations is strongly enforced and is quite different from what the preceding studies show.<Key words> implicit tax hypothesis, tax subsidy, risk adjustment, Fama and Frenches' 3－factors model.
Keywords
- implicit tax hypothesis
- tax subsidy
- risk adjustment
- Fama and Frenches' 3-factors model
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