GOVERNMENT AS THE FIRMS THIRD FINANCIAL STAKEHOLDER:

IMPACT ON TAX STRUCTURE, DISCOUNT RATES AND VALUATION

Ronald W. Spahr
Professor and Chair, Department of Finance, Insurance and Real Estate
Fogelman College of Business and Economics
University of Memphis, Memphis, TN 38152-3120
Office phone: (901) 678-1747 or 5930, Fax: (901) 678-0839
spahr@memphis.edu
Pankaj Jain
Assistant Professor, Department of Finance, Insurance and Real Estate
Fogelman College of Business and Economics
University of Memphis, Memphis, TN 38152-3120
Office phone: (901) 678-3810, Fax: (901) 678-0839
pankaj.jain@memphis.edu
Fariz Huseynov
Assistant Professor, Department of Management, Marketing and Finance
College of Business
North Dakota State University, Fargo, ND 58103
fariz.huseynov@ndsu.edu
October 25, 2009
We thank the participants at the Southern Finance Association 2006 Annual Meeting, Midwest Finance Association 2008 Annual
Meeting, Financial Management Association 2008 Annual Meeting, the Center for Economics and Politics (Prague) and Indian
Institute of Management (Bangalore) Finance seminar series for excellent comments and suggestions. We are grateful to David
Kemme for comments and help with data access. Financial support from FCBE summer research grant and Memphis CIBER is
gratefully acknowledged. We also appreciate American Enterprise Institute for Public Policy Research (AEI) for providing us
with data on international tax rates.
1
GOVERNMENT AS THE FIRMS THIRD FINANCIAL STAKEHOLDER:
IMPACT ON TAX STRUCTURE, DISCOUNT RATES AND VALUATION
Abstract
We extend Modigliani and Millers capital structure model by adding government as the third major
financial stakeholder. Stockholders, bondholders and government (federal and state) each possess a
stake in the firm because of the potential to receive future cash flows. Given M&Ms no growth
assumption, we posit a conservation of value where a firms capital structure and tax structure have no
effect on total firm value; however, have major effects on relative stakeholder values and appropriate
discount rates. Considering the three stakeholder helps clarify the controversy over appropriate discount
rates for each stakeholders cash flows, the social discount rate and tax structure. We further extend
M&Ms models in an intertemporal framework that allows for reinvestment of earnings and firm
growth. This extension also has significant implications on valuation and tax structure policy. We
demonstrate that corporate tax burdens eventually falls on shareowners and may significantly impact
domestic corporations ability to compete in a global economy. In an intertemporal framework, shifting
the tax incidence to individuals will increase governments tax revenues through corporate growth
despite its declining proportional stake in firms.
Keywords: Tax, capital structure, government, stakeholder, growth
JEL Classifications: E62, H2, H21, K34
2
Introduction
Most financial literature, including the seminal work of Modigliani and Miller (M&M) [1958
and 1963] and the stream of articles that followed, considered a firms financial stakeholders to be its
shareowners
1
and debtholders. The vast majority of this work has ignored the existence of government
as the third major financial stakeholder. We extend M&Ms basic capital structure models by adding
government as the third financial stakeholder. Governments financial stake, resulting from multiple
layered tax systems, may be quite substantial and may significantly affect firms financing and
investment decisions and their abilities to compete in a global economy. By adding government, we feel
that we extend corporate finance theory to include all major financial stakeholders, which allows a
clearer understanding of firm valuation, capital structure and cost of capital. Given Modigliani and
Millers original model and assumptions, including no growth, we may assume that a firms value is
unaffected by taxes: a conservation of aggregate firm value. This logical assumption provides
clarification of existing inconsistencies in the literature including appropriate discount rates used for
valuation, investment and financing decisions.
We make several additional contributions to the literature on the impact of tax incidence on
financial growth, investment hurdle rate, investment policy and location, capital structure, stakeholders
proportional shares in a firm, and business valuation.
In subsequent sections, we develop an intertemporal model that allows for reinvestment of
retained earnings and firm growth. Changes in tax structure, capital structure and dividend policy in the
intertemporal model affect a firms growth rate and its aggregate value as well as distribution of value
across stakeholders. We show that by modifying tax structures and rates, governments may increase or
decrease aggregate values derived by all firm stakeholders.
1
We use shareowner instead of stockholder because not to confuse the latter with stakeholder used extensively throughout
the paper.
3
We extend Stiglitz (1973) study to analyze the effects of taxes on cost of capital and investment
decisions. Stiglitz concludes that, in the absence of uncertainty, corporate income tax is completely non-
distortionary and does not shift resources from the corporate to the non-corporate sector. Although tax-
irrelevance holds true within a domestic economy with a homogenous tax structure, we show that
corporate income taxes become relevant for investment decisions in a global economy with
heterogeneous tax structures. Particularly, venues with high corporate tax rates have lower firm values
and growth rates, and higher investment hurdle rates relative to venues with lower corporate taxes.
We observe that corporate taxes potentially have a greater impact on capital investment and
economic growth than personal taxes. Corporate taxes affect investment decisions by increasing hurdle
rates and reducing market-to-book (M/B) ratios; thereby, causing investment after-tax NPVs to decline
or turn negative even though the pre-tax cash flows may imply a positive NPV. Corporate investment
decisions are less sensitive to personal taxes since personal taxes on capital gains may be deferred.
However, for firms operating in a globally competitive market and tax environment, all taxes matter.
Higher personal taxes also lowers M/B ratios and shareowners must decide not only whether to invest,
but also where to invest to maximize investment value. These results reinforces Lewellen and Lewellen
(2006) conclusions that a firm should use internal equity first and the impact of cash flows on
investment decisions is affected by both payout policy and the level of personal and corporate taxes.
Also, our results support Galai and Wiener (2003) among others, who observe that by taxing corporate
profits, government may affect corporate investment decisions causing firms to invest less than what
would be socially optimal. Investments that are desirable from the standpoint of social welfare may be
rejected by shareowners, which may ultimately lead to the collection of fewer taxes.
An additional contribution relates to the timing of taxes on capital gains versus dividend
payments. Increased future firm growth resulting from the increased availability of retained earnings
4
creates an immediate increase in stock price; however, cash flows in form of additional future dividends
will result over the life of incremental capital investments. Thus, if realized, an immediate capital gain
will result in increased tax revenues. In contrast, cash flows resulting in dividend payments and taxes
are more synchronized. The intertemporal framework with retained earnings and firm growth explicitly
incorporate these valuation details.
Governments financial stake, resulting from multiple layered tax systems, may be quite
substantial and significantly affect firms viabilities to compete in a global economy. High taxes reduce
incentives for domestic capital investment and may provide the stimulus for multinational firms to retain
assets in lower tax venues and reincorporate or relocate to lower corporate tax venues.
2
Sullivan (2004a)
finds that U.S. multinational corporations are increasingly shifting tens of billions of dollars of their
profits to such tax havens as Bermuda, Ireland, Luxembourg, and Singapore. Sullivan (2004b) also
suggests that this trend of MNC relocations to better tax environments elsewhere may be costing the
United States Treasury lost tax revenues each year from $10 billion to $20 billion. Also interesting is the
fact that although the United States has the OECD's second-highest corporate tax rate, it realizes the
fourth-lowest revenue from corporate taxes
3
.
We agree that government public welfare spending is necessary, thus we propose a tax neutral
change in tax structure. Under a tax revenue neutral condition, corporate tax reductions would
necessarily shift to individuals; however, a reduction in corporate tax rates may substantially raise
aggregate financial stakeholder values. We find that individual income tax rates have less effect on
aggregate stakeholder value than corporate tax rates, thus, in the long run, higher growth rates resulting
from lower corporate tax rates and increased capital investment may ensure that government revenues
2
The recent announcement that Halliburton is moving their corporate headquarters from the United States to Dubai and
possibly incorporating in Dubai, United Arab Emirates may be an example of a change of venue in favor of lower taxes and
lower government corporate stake.
3
http://www.taxfoundation.org/research/show/22802.html
5
and expenditures may be maintained or even increased without excessively burdening individual tax
payers. This may be achieved despite governments declining proportional stake and impact on firms.
Conservation of Financial Stakeholder Value for the No Growth Firm
Conservation of stakeholder value posits that under the original Modigliani and Millers (M&M)
[1958 and 1963] no-growth assumptions, aggregate financial stakeholder value cannot be created or
destroyed by merely changing the firms capital structure or tax structure. Applying M&Ms Proposition
I, a firms basic intrinsic value is created by cash flows emanating from returns on investments in real
assets, where, changes in aggregate stakeholder value can result only from changing expectations in
future cash flows, basic risk of the firm, and discount rates. Basic risk emanates from the uncertainty of
cash flows or inherent business risk. For a no growth firm, change in the capital and tax structure merely
redistributes wealth among financial stakeholders.
A. Conservation of Financial Stakeholder Value the No Growth, Unlevered Firm without Taxes
Initially we assume a world similar to M&M, where all earnings are paid out as dividends (no
reinvestment other than economic depreciation and no growth). Earnings before interest and taxes,
EBIT, follow a perpetual, no growth, stationary mean-variance distribution based on initial investment,
I
0
, and return on investment, ROI. The cost of equity capital for the unlevered firm, k
su
, is dependent
only on the firms basic business risk.
In this world, in the absence of taxes, the value of the unlevered firm (Modigliani and Millers
Proposition I [1958]) is:
su
T
k
EBIT
V
(1)
Assuming a firm with an initial investment of $55.55 million and a ROI of 18 percent, perpetual
mean EBIT will be $10 million per year. Applying a 10 percent cost of equity capital for the unlevered
firm, the total stockowner and stakeholder value of the firm is $100 million.
6
B. Corporate Taxes and Two Financial Stakeholders-the unlevered firm
Assuming that only corporate taxes, T
c
, where both stockholders and government future cash flows
are discounted using k
su
, the pretax value of the firm is preserved and divided between the two stakeholders.
4
su
c
su
c
T
k
T EBIT
k
T EBIT
V
) ( ) 1 (
+

(2)
For the identical above firm with an initial investment of 55.55 million, perpetual mean EBIT of $10
million per year, a cost of equity capital of 10 percent and a 40 percent corporate tax rate
5
, the aggregate
value of the firm remains at $100 million; however, the shareowners stake has declined to $60 million and
the governments stake is now $40 million.
Equation (2) assumes conservation of firm value exists when adding government taxes; however to
maintain the same stakeholder value, tax revenues must also be discounted at k
su
. The literature on the
social discount rate for example, Caplin and Leahy (2004) argue that the discount rate for social
consumption should depend on future preferences of the social consumer rather than the opportunity
cost of tax revenues extracted from taxpayers. Their argument as well as much of the social discount rate
literature indicates a rate lower that k
su
, which would suggest that the aggregate value of the firm for all
stakeholders increases when taxed. This obviously, makes no intuitive sense and would argue in favor
of socialism rather than a market allocation of capital. Alternatively, Azar (2009) correctly argues that
the US social discount rate should be market-driven and relies on trade-offs in financial markets. The
4
Note that both equity holder and government cash flows must use k
su
as the discount rate to preserve
the real asset intrinsic value of the firm. Public finance theory and application usually suggests that a
lower discount rate (social discount rate) should be used for public cash flow. If, however, a lower
discount rate were applied, the result would be that total financial stakeholder value would increase
because of taxes. It is unreasonable that the total stakeholder value of the firm would increase because
of taxes.
5
Accounting firm KPMG found that taking into account both national and subnational taxes, the
average tax rate for U.S. firms is 40 percent when considering U.S. federal and state corporate combined
rates. [See Edwards and de Rugy, 2002].
7
underlying assumptions are that public budgets displace the marginal private investment. We argue that
the correct social discount rate should be k
su
.
6
The literature usually suggests that after-tax cash flows must be discounted at after-tax discount
rates. However, in globally competitive markets with heterogeneous corporate tax structures, there is
no single after-tax return. Shareowners, depending on the country of residency/incorporation of each
corporation, have an array of unique effective corporate tax rates. Thus, shareowners receive after
corporate-tax cash flows, CF(1-T
c
), but their opportunity cost and appropriate discount rate depends on
the tax structure of the corporations country of incorporation, k
su
(1-T
c
), where T
c
is the venues
effective corporate tax rate. Thus each equity investor is willing to pay the same price as all investors
for a corporations stock in the global economy. If, however, the firm were to reincorporate to a new
lower-tax venue, the value of the shareowners stake would increase and governments stake decline.
Use of an after corporate tax discount rate will inflate the value of firm. For example, the
hypothetical firm introduced after equation (2) would have a value of $167 million if cash flows were
discounted at after corporate cost of equity (6 percent). The shareowners stake would be $100 million and
governments stake would be $67 million. However this result contradicts with the conservation of firm
value.
C. Corporate Taxes and Three Financial Stakeholders-the levered firm
Continuing to ignore the effects of personal income taxes, and assuming M&M no growth firms,
stakeholder values when considering only corporate income taxes for the levered firm may be written as:
d
c d
su
c
d
d
d
c d
d
d
su
c
T
k
DT k
k
T EBIT
k
d k
k
DT k
k
D k
k
T EBIT
V + + +

) ( ) 1 (
(3)
6
Others have also argued that when discounting after tax cash flows that after tax discount rates such as
k
su
(1-T
c
) should be used. Obviously, this also makes no intuitive sense in the context of equation (2).
8
where, EBIT (1-T
c
) is the same cash flow as for an unlevered firm, k
d
D is the shareowners loss due to
adding debt and k
d
DT
c
is the interest tax shield belonging to the shareowner represented by tax deductible
debt interest payments. k
d
D is the cash flows belonging to debtholders, and last two terms represent
government tax revenues. Thus, the value of the firm when applying the appropriate risk adjusted discount
rates and accounting for all financial stakeholders remains constant at V
T
where equity and debtholders
stake (first four terms) increases by the present value of the interest tax shield and the government stake
decreases by the same amount.
7
Equation (3) also may be written as (4) below; however, this ignores the payment of interest by the firms
shareowners and the receipt of interest payments by debtholders:
d
c d
su
c
d
c d
su
c
T
k
DT k
k
T EBIT
k
DT k
k
T EBIT
V + +

) ( ) 1 (
(4)
Again, assuming a firm with I
0
of $55.55 million, perpetual mean EBIT of $10 million per year, k
su
of
10 percent, $10 million debt (D) at 6 percent (k
d
) and T
c
of 40 percent, the aggregate value of the firm remains
at $100 million. This scenario results in a shareowners stake of $54 million, the debtholders stake of $10
million, where the governments stake has declined to $36 million. As will be apparent through subsequent tax
structures and firm growth scenarios, the introduction of debt, under the current tax structure, where debt
interest is tax deductible, will always reduce both the governments stake and the shareowners stake in the
firm. The loss of shareowner value as a result of increasing debt arguably may have an adverse agency impact
on strategic decision making within the firm, since shareowners have less of a stake in the firm. Risk is now
shared with government, but at least in the short-run, government has no say in firm decisions involving
7
Note in equation (3), the appropriate discount rate for the interest tax shield is k
d
as was used by
Modigliani and Miller [1963] rather than k
d
(1-T
c
) as has been suggested in other studies. The interest
tax shield that increase shareowner value is transferred from government, thus it makes no intuitive
sense to apply a discount rate of k
d
(1-T
c
) to government cash flows. The firms cost of debt is k
d
(1-T
c
),
but the required return to the debtholder, who determines debt value, is k
d
.
9
operations and capital investment. However, as we can observe from the evolution of corporate regulation,
restrictions and penalties, government does attempt to control corporate decision making in the long-run.
D. Corporate and Personal Taxes with Three Financial Stakeholders for the No-Growth Firm
Debt redistributes wealth by decreasing shareowners stake by the face value of debt; however,
shareowners receive the benefit of the interest tax shield. Of course, shareowners also invest less initially
because debtholders provide part of the initial investment. Because of the tax deductibility of debt interest,
the interest tax shield increases shareowners stake and decreases governments stake in the firm by the
same amount; whereas, increases in tax rates and adding personal taxes will increase governments stake in
the firm while reducing shareowners as well as debtholders value. Debtholders stake in the firm is fixed
by contract; however after personal taxes on interest income they receive only after-tax income and
government receives personal taxes on the interest.
8

We allow for three types of income taxes, T
C
, corporate taxes, T
S
, personal taxes on dividends, and T
d
,
personal taxes on debt interest. Assuming a no firm growth and applying the appropriate risk adjusted discount
rates, the value of the firm may be written as:
d
d d
d
s c S c d
d
d
su
S c
T
k
T D k
k
T T T T D k
k
D k
k
T T EBIT
V
) 1 ( ) ( ) 1 )( 1 (
+
+
+

d
d d
d
s c S c d
su
S c S c
k
DT k
k
T T T T D k
k
T T T T EBIT
+
+

+
+
) ( ) (
(5)
where, the first term in (5) is the cash flows to shareowners remaining after payment of both corporate taxes
and personal taxes on dividends. The second term represents the discounted payment of debt interest by the
shareowner and the third term represents the interest tax shield on debt. The fourth term represents the
debtholders after personal tax realized return. The fifth terms represent the governments share of
corporate and personal taxes on dividends, the sixth term represents the interest tax shield given up by
8
For the purposes of this study, we assume that interest rates and firm risk remains unchanged, thus market value and book
value of debt are always the same.
10
government and the last term is governments share of personal taxes on debt. Observe the symmetry in
equation (5) where, the first and fifth terms combined represent all cash flows other than interest payments;
whereas, the remaining terms represent the values of debt interest payments.
Note that if personal taxes and governments stake are ignored, equation (5) is similar to
MM (1958, eq.10, p. 272). With some additional algebraic manipulation equation (5) may be re-written as:
1
]
1

) 1 (
) 1 )( 1 (
1
) 1 ( ) 1 )( 1 (
1
0
D
S c
d
d t d
SU
S c
T
T T
k
T D k
k
T T EBIT
V
+

d
d t d
d
S C S C t d
SU
S C S c
k
T D k
k
T T T T D k
k
T T T T EBIT
+
+

+
+
) [ ) (
1
(6)
In equation (5), EBIT also may be calculated as a product of initial investment, I
0
and ROI
e
, the
return on investment. Table 1 provides a numerical example of a firm that initially invests 55.56 million and
generates ROI of 18% resulting in perpetual mean EBIT of $10 million per year. We assume k
su
is 10
percent throughout the paper. We assumed a levered firm to have $10 million of debt, face and market
value, with an interest rate of 6%. Considering a corporate income tax rate of 40 percent, personal tax rate
on dividends of 15 percent and personal tax on interest of 28 percent the aggregate value of the firm
remains at $100 million, but the shareowners stake is $45.9 million, the debtholders stake is $7.2 million
and governments value of debt is $2.8 million, where the total market value of the debt, as defined by
contract, is $10 million, and governments total stake is $46.9 million. Table 1, Panel A, Line 1 shows that
after adding government stake through different tax layers, the aggregate firm value remains the same
confirming MM proposition 1. However, the shareowners stake in the firm becomes smaller and M/B ratio
falls very close to 1. The M/B ratio is equal to the ratio of V
0
, value of shareowners stake or $45.9 million
divided by I
0
, the initial equity investment or $45.56 million. For this firm, the M/B ratio for is 1.008 or
very close to the minimum of 1.00, where any firm or capital project with a M/B ratio below 1.00 would
never have been started. Thus, the combination of corporate taxes and personal taxes clearly has adverse
11
effects for the economy. Although part of the loss in M/B ratio is offset by any gains that shareowners
derive from government spending, firms may look for lower tax venues to reincorporate and jobs may be
outsourced to countries offering such tax environments.
Note that we used k
d
to discount after-tax interest payments received by debtholders and the tax
revenues paid by debtholders to government. Another controversy exists as to the correct discount rate for
debtholders; where some may argue that a discount rate of k
d
(1-T
d
) should be applied to the debtholders
after-tax interest. First, using a discount rate of k
d
(1-T
d
) will overstate the total value of debt in the firms
valuation and secondly, even though debtholders paid par value for the debt, their opportunity cost
assuming a 28 percent personal tax rate on debt interest will be k
d
(1-T
d
). However, when determining each
stakeholders value and stake in the firm, the appropriate market rate is k
d
. Thus, in the above example
even though debt has a market value that is equal to par value for each individual bondholder (total of $10
million), each debtholder receives only the after-tax interest payments but discounts them at his/her unique
after personal tax discount rate for debt. Assuming an average personal tax rate on debt interest of 28
percent, the value of the debt from the firms perspective held by debtholders is just $7.20 million. The
governments share of stake in the debt is the remaining $2.80 million.
9
Line 1a of Table 1 shows the calculations for no-debt firm. Comparing lines 1 and 1a we note that
although the tax shield offered by interest on debt has a positive effect for shareowners, the face value of
debt transferred from shareowners to debtholders dominates the tax-shield effect. The reduction of
shareowners stake as a result of increasing debt, as previously arguably, may have an adverse impact on
strategic decision making within the firm by encouraging excessive risk taking, low commitment level, and
effort shirking.
9
Bondholders have very heterogeneous personal tax rates ranging from zero for some pension funds and
sovereign investment funds to in excess of 40 percent for high income individuals when considering
both federal and state income taxes.
12
Shareowners reach the highest stake in Line 3 where no taxes are imposed by government and
M/B ratio rises to 1.98. Shareowners, both domestic and foreign, would mainly consider the direct
impact of taxes on M/B ratio at the time of making investment decision because government spending is
a public good, which at the margin, may be enjoyed by domestic investors even without making any
investment. For foreign investors in a competitive global economy, corporate taxes only serve to reduce
their investment incentive.
To understand the trade-off between corporate and personal taxes, we finally present calculations
with zero corporate tax and point of taxation shifted to personal income from investments in line 4. A
zero corporate tax structure will result in a higher market to book (MB) ratio and higher shareowners
stake. We will discuss our proposed tax structure in details in Section IV.
E. Literature Confusion regarding before-tax and after-tax discount rates.
Taggart (1991), states: However, care must be taken specifying investors required rates of
return. While these are often analyzed on a pre-tax basis, it is after-tax returns that ultimately drive the
valuation process, and thus the equilibrium relationships among after-tax returns must be understood.
We disagree with this statement because, as previously discussed, in a globally competitive market with
heterogeneous tax structures, there is no single after-tax return. Every shareowner and debtholder may
have unique personal tax rates ranging from zero for some retirement plans, tax exempt organizations
and sovereign funds to the maximum for high income investors. Investors, whether shareowners or
debtholders, receive after personal-tax cash flows, CF(1-T), but their opportunity cost and appropriate
discount rate is their unique individual after-tax discount rate, k(1-T), thus each is willing to pay the
same price as all investors for the same asset.
We question Taggarts observations regarding discount rates for at least two reasons. 1) He
implicitly assumes a closed economy with one homogeneous tax structure and 2) He is assuming two
13
types of riskless asset-debt with a return of r
fd
and equity with a return of r
fe
. He claims that these returns
will be set in the market so that r
fd
(1-T
p
) = r
fe
(1-T
pe
). This relationship will hold only in a world with a
homogeneous tax structure where T
p
is the single tax rate on debt and T
pe
is the single tax rate on equity.
Also, assuming that there is one world-wide risk free rate on debt and another world-wide risk free rate
on equity may be plausible, but is not defendable in a global market environment.
In a globalized world where investors find different tax environments, some with zero tax rates,
investors may allocate their investments to minimize their personal tax liability assuming other risk
factors constant. Other investors may be required to accept the tax structure in which they reside or be
forced to relocate. In all cases both their cash flows and discount rates will be multiplied by (1-T),
where T is their unique tax rate for either dividends or interest payments. All investors, however, will
be willing to pay the same price for the same asset.
Richter (2004) reviews different schools of thought on the question of if and how personal taxes
should be incorporated into the valuation of companies or projects. He presents specific cases which
lead to general irrelevance of personal taxes, for instance, if the growth rates of the company to be
valued equal the growth rate of the market portfolio (or any other comparable asset). His work, like that
of much of the literature, implicitly assumes a closed economy with a homogeneous tax structure. His
results assuming a globally competitive economy with heterogeneous tax structures would have found
general irrelevance of personal taxes when valuing a firm, capital project and ownership values for each
stakeholder.
Thus, Taggarts statement that in general rates of return should be compared on an after-
personal-tax basis is difficult to defend given a world with heterogeneous tax structures. He goes on to
say, Pre-tax comparisons are valid only if all rates apply to instruments that receive identical tax
treatment. Again in a global setting with heterogeneous corporate and personal tax structures, we
14
believe that before tax discount rates should be used when estimating the value of the firm held by each
stakeholder. Thus, we will use before-tax discount rates in our valuation approach.
F. Hurdle Rates
An alternative approach for assessing the effect of taxes on the firm is to calculate the minimum
required return on investment (ROI) necessary to undertake new capital projects given different tax rates
and structures. Figure 1 demonstrates the minimum required ROI necessary to obtain the target M/B=1
given different tax rates and leverage ratio. An M/B ratio, the ratio of shareowners value to the initial
equity investment, higher than unity is necessary to undertake capital projects because no investor would
rationally invest in projects which trade in the market below the book value of invested equity. Required
ROI on y-axis is the rate of return on invested capital that makes M/B ratio equal to 1. The axis showing
taxes is based on the calculation 1-(1-T
C
)*(1-T
S
) rate, where T
C
is corporate income tax rate and T
S
is
personal income tax rate on dividends. Leverage on z-axis shows the different possible Debt/Total
Assets levels for a company. For this figure a payout ratio of 100% is assumed in Panel A, which results
in no growth. In the absence of taxes, a k
su
, of 10% will require a minimum ROI of 10%, and leverage
has no effect on the decision to accept or reject a project. As tax rates increase, project ROIs must
increase substantially. Under the current U.S. tax structure, a combination of federal and state taxes may
result in high income individuals paying up to 75% in corporate and personal taxes ((1-(1-Tc)*(1-Ts))
where unlevered firms must reject any projects with an internal rate of return (IRR or ROI) below 40%.
The damaging effects of taxes may be partially ameliorated by using leverage. However, even with 60%
debt financing, the minimum required ROI is 25%, which is well above shareowners required rate of
return after taxes, k
su.
[Insert Figure 1 here]
15
I. Intertemporal Model with Retained Earnings and New Growth
Opportunities
Our previous models assumed that all earnings of the firm were paid out as dividends implicitly
assuming that no new internally or externally generated growth opportunities exist in the economy.
Realistically, in addition to replacing depreciated assets, firms generally find some new investment
opportunities with ROIs exceeding their cost of capital. In this section allowing reinvestment of income
and growth, we show that tax rates and structures have a significant impact on growth rates and aggregate
stakeholder value.
Alternatively, growth may occur organically through reinvestment of retained earnings or by issuing
more costly new equity, we focus on the former. In frictionless markets, the source of equity financing is
irrelevant; however, in actual markets, existing shareowners capture the full benefits of new investment
only through reinvested earnings because of adverse selection problems facing suppliers of external capital.
It is important to note that investment policy and not dividend policy is our focus; nevertheless, we examine
both a strategy that entails sets of fixed investment opportunities as well as a strategy with fixed dividend
payout ratios.
M&M (1961) show that investment policy is the key to valuation of a firm and dividend policy per
se may be irrelevant. Hence even a firm that pays out all earnings as dividends may grow as long as it is
able to issue fresh equity at a cost comparable to retained earnings. M&M (1961, p 417) also note that the
essence of growth is not expansion, but the existence of opportunities to invest significant quantities of
funds at ROIs higher than the required rate of return. This should help to make clear among other things,
why the cost of capital to the firm is the same regardless of how investments are financed or how fast the
firm is growing. The function of the cost of capital in capital budgeting is to provide the cut-off rate in the
sense of the minimum yield that investment projects must promise to be worth undertaking from the point
16
of view of the current owners. As in previous sections, we extend M&Ms models by adding government
as the third stakeholder and by allowing reinvestment of earnings. As a result, government tax policy affects
growth rates even though dividend policy may be irrelevant in the absence of taxes.
-------------edited to here----------------------------
A. Intertemporal Growth Model for Unlevered Firm with All Taxes
We first consider the unlevered firm with corporate income tax, T
C
, personal taxes on dividends, T
S
and because of reinvestment of retained earnings and the potential for stock price appreciation, personal
capital gains taxes, T
CG
. Capital gains taxes are more difficult to define as they are collected only when
gains are realized. Thus, under the current US tax structure, capital gains taxes may be zero, assuming
gains are never realized, equal to the ordinary tax rates for short-term realized gains or equal to the current
long-term capital gains tax rate if capital gains are realized after a year. Our analysis is generalized to
capture these various scenarios with the parameter , which stands for capital gains realization rate.
Considering all current taxes discussed above, we may formulate the following intertemporal model for
shareowner cash flows for an unlevered firm in period t. Following, Copeland and Weston (1988, page
549), net cash flows (CF) for an unlevered firm, with all forms of taxes, may be written as
10
:
( ) [ ]
( ) [ ]
1
]
1

+ +

1
]
1

+
1
]
1

1
]
1

su
su C g cg
S S C g
su
su C g
cg S S C g e
su
su C g cg
S S C
S
su
S C g
cg S C e
k
k T ROI T
T I T T ROI I EBIT
k
k T ROI
T T I T I T ROI I ROI I CF
k
k T ROI T
T I T T EBIT
T I
k
T T ROI I
T T I T ROI I CF
] ) 1 ( * [
1 * ) 1 ( * ) 1 )( 1 ( * ) * (
) 1 ( *
* * ) 1 ( * ) 1 ( ) 1 ( * ) * ( *
] ) 1 ( * [
1 * ) 1 ( * ) 1 )( 1 ( * ) (
) 1 ( *
) 1 )( 1 ( * *
* ) 1 ( ) 1 ( * ) * (
2 1 1
2 2 1 0 2
1 1
1
1
1 0 1

10
It may be argued that reinvested earnings possibly resulting in capital gains may require a higher discount rate than for
dividends, Bird-in-Hand Theory. We assume, however, that both dividends and retained earnings cash flows have the same
business risk, thus the same discount rate.
17
. . . . . . . . . . . . .
1
]
1

+
1
]
1

1
]
1

1
]
1

,
_

su
su C g cg
S t s c
N
g
su
su C g
cg S t s t c
N
g e t
k
k T ROI T
T I T T ROI I EBIT
k
k T ROI
T T I T I T ROI I ROI I CF
] ) 1 ( * [
1 * ) 1 ( * ) 1 ( * ) 1 ( * ) * (
) 1 ( *
* * ) 1 ( * ) 1 ( * ) 1 ( * ) * ( *
1
1
1
1
1
0

(7)
Not considered explicitly in prior literature is the difference between the timing of cash flows
including taxes and the valuation effects of growth projects. Note that personal dividend taxes on
growth projects are payable in future years out of each years return. However assuming that investment
in period t (I
t
) is derived from retained earnings and consequently not distributed to shareowners as
dividends, the shareowners opportunity cost is I
t
*(1-T
S
) and not I
t
. In other words, corporate retention
and reinvestment in lieu of dividend payout provide immediate capital gains and serve as a temporary
shield against personal taxes on dividends. However, reinvestments result in increased returns and
dividend payout in future years. Although, cash flows resulting from capital investments growth cash
flows are intertemporal, their valuation is immediate. Stockowners receive the effect of future expected
dividend increases as soon as investment decisions are announced resulting in immediate capital gain
opportunities. The term which we multiply by T
CG
represents this valuation gain at realization rate.
I
1
*ROI
g
(1-T
c
)(1-T
s
)/k
su
is the capitalized present value of future dividends resulting from the new
investment. From this we subtract I
1
(1-T
s
), which is the present investment opportunity cost net of
dividend tax shield because retained earnings are not subject to dividend taxes.
Defining
1
]
1

+
su
su C g cg
k
k T ROI T ] ) 1 ( * [
1

= , as the capital gains tax effect on reinvestment, firm
valuation may be expressed as:

18

+
+
+
+
+
+
+
+

N
su
s t s c
N
g
su
s s c g
su
s s c
k
T I T T ROI I EBIT
k
T I T T ROI I EBIT
k
T I T T EBIT
V
) 1 (
* ) 1 ( * ) 1 ( * ) 1 ( * ) * (
.. ..........
) 1 (
* ) 1 ( * ) 1 ( * ) 1 ( * ) * (
1
* ) 1 ( * ) 1 ( * ) 1 ( * ) (
1
1
1
2
2 1 1
1 1
0

( )

+ 1
1
]
1

,
_

+
+

N
t
t
su
N
t
su
c g
s t
N
t
t
su
s c
k k
T ROI
T I
k
T T EBIT
1 1 1
1
1 ) 1 (
) 1 ( *
* ) 1 ( *
) 1 (
) 1 ( * ) 1 ( *

(5)
In a perpetual model
( )

+

+

+

'

1
1
]
1

,
_

+
+

1
1
1 1 1
1
0
) 1 (
] * ) 1 ( * [ * ) 1 ( *
) 1 ( * ) 1 ( *
1 ) 1 (
) 1 ( *
* ) 1 ( *
) 1 (
) 1 ( * ) 1 ( *
lim
t
t
su su
su c g s t
su
s c
N
t
t
su
N
t
su
c g
s t
N
t
t
su
s c
N
k k
k T ROI T I
k
T T EBIT
k k
T ROI
T I
k
T T EBIT
V

(6)
= Value of assets in place + value of future growth. Note that, in perpetuity, the bracket is simplified as:
( ) ( )
( )
t
su su
su c g
t
su
t
su su
c g
t
su
t N
t
t
su
c g
t
su
t
su
N
t
su
c g
k k
k T ROI
k k k
T ROI
k k
T ROI
k k k
T ROI
) 1 ( *
* ) 1 ( *
1 ) 1 ( *
) 1 ( *
1 ) 1 (
) 1 ( *
) 1 (
1
1 ) 1 (
) 1 ( *
lim
1 1
+

1
1
]
1

If we substitute back in equation (6), after further simplification the shareowners stake will become:

+

+

1
1
0
) 1 (
) ) 1 ( * ( * ) 1 ( * ) 1 ( *
) 1 ( * ) 1 ( *
t
t
su su
su c g cg s t
su
s c
k k
k T ROI T T I
k
T T EBIT
V

(7)
For government stake, the general formula for cash flows and valuation are:

,
_

1
]
1

+
1
]
1

su
su C g
cg S S N S C S C
N
g t
k
k T ROI
T T T I T T T T ROI I EBIT CF
) 1 ( *
* * ) 1 ( * ) * ( * ) * (
1
1
1

+
+ +
+
+

1
1
0
) 1 ( *
)] * ) 1 ( ( * ) ) 1 ( * ( * [ *
) * ( *
t
t
su su
cg S S su C g C g t
su
S C S C
k k
T T T k T ROI T ROI I
k
T T T T EBIT
V

(8)
19
B. Fixed Dividend Payout Ratio () and Flexible Investment Schedule
In the previous section we developed the valuation formulas for shareowners and governments
stake in an unlevered firm. Although these formulas are useful to separate the impact of growth projects,
further simplification is needed to obtain more practical valuation formula. The firm usually chooses from
one of two choices regarding new investment decisions. First, the firm may implement a fixed dividend
payout policy and invest residual after tax earnings in growth projects, or alternatively, the firm may fix
annual investment and pay residual after tax earnings as dividends. If we defined annual investment as a
constant fraction of earnings, I
n
EBIT
n
*(1-T
c
)*(1-),

we can further simplify the equation. Note that
EBIT
t
= EBIT
t-1
+ROI
g
*I
t-1
= EBIT
t-1
+ROI
g
* EBIT
t-1
*(1-)*(1-T
c
) = EBIT
t-1
*[1+ROI
g
*(1- ) *(1-T
c
)]
By successive substitution, we have
EBIT
t
=EBIT
1
*[1+ROI
g
*(1- ) *(1-T
c
)]
t-1
Substituting EBIT
N
and I
n
in the equation above

,
_

+
+
+

+

+
+
+

1
1
1
1
1
1
1
0
1
) 1 )( 1 ( * 1
*
)) 1 )( 1 ( * 1 ( *
) ) 1 ( * ( * ) 1 ( * ) 1 ( * ) 1 ( * ) 1 ( *
) 1 ( * ) 1 ( *
) 1 ( *
) ) 1 ( * ( * ) 1 ( * ) 1 ( * )) 1 ( * ) 1 ( * 1 ( * ) 1 ( * ) 1 ( *
) 1 ( * ) 1 ( *
t
t
su
c g
c g su
su c g cg s c
su
s c
t
t
su su
su c g cg s
t
c g c
su
s c
k
T p ROI
T p ROI k
k T ROI T T p T EBIT
k
T T EBIT
k k
k T ROI T T T p ROI p T EBIT
k
T T EBIT
V

,
_

) 1 )( 1 ( *
) ) 1 ( * ( * ) 1 ( * ) 1 (
1
) 1 ( * ) 1 ( *
1
c g su
su c g cg
su
s c
T p ROI k
k T ROI T p
k
T T EBIT

We can also find the governments stake in the same manner, then the aggregate firm value becomes:

,
_

+ +
+ + +
+

,
_

)] 1 ( * ) 1 ( * [
)] * ) 1 ( ( * ) ) 1 ( * ( * [ * ) 1 ( * ) 1 (
) * (
) 1 ( * ) 1 ( *
) ) 1 ( * ( * ) 1 ( * ) 1 (
1
) 1 ( * ) 1 ( *
1
1
0
C g su
cg S S su C g C g C
S C S C
su
c g su
su c g cg
su
s c
T p ROI k
T T T k T ROI T ROI p T
T T T T
k
EBIT
T p ROI k
k T ROI T p
k
T T EBIT
V

(9)
20
As a numerical illustration, we continue with our example firm that generates ROI
e
of 18% on
existing projects with a book value of $55.56 million but now it identifies further growth opportunities
every year that generate an ROI
g
of 15%. The firm invests in projects with ROIs greater than the required
rate of return to increase existing shareowners value and the value of company. If the firm maintains a
dividend payout ratio () of 60% and is able to reinvest only residual retained earnings in growth projects,
the growth rate (g) in line 5 will be 6.8%. Thus, referencing Table 1, the availability of growth opportunities
increases total firm value by 50% to $150 million in line 5 compared to the no growth case in Line 3. M/B
ratio for shareowners also jumps to 2.70.
C. Fixed Investment Opportunity Set and Flexible Payout Ratio
If a firm chooses a fixed dollar investment policy then we define the growth opportunity set by
expressing the dollar amount as a constant proportion of existing assets such that;
EBIT
1
=I
0
*ROI
e
; I
1
=c
2
*I
0
*ROI
e
and I
t
=I
t-1
+I
t-1
*ROI
g
*c
1
=I
t-1
*(1+ROI
g
*c
1
), where c
1
and c
2
are constants.
Thus, growth opportunities require fixed investment outlays and the residual obtained by deducting the
investment quantity from EBIT is distributed to shareowners. By successive substitution we have
I
t
=I
1
*(1+ROI
g
*c
1
)
t-1
, and shareowners stake, first term in valuation equation (7), becomes:
) * ( *
) ) 1 ( * ( * ) 1 ( * ) 1 ( *
) 1 ( * ) 1 ( *
1
* 1
*
) * 1 ( *
) ) 1 ( * ( * ) 1 ( * ) 1 ( *
) 1 ( * ) 1 ( *
) 1 ( *
) ) 1 ( * ( * ) 1 ( * ) 1 ( * ) * 1 ( *
) 1 ( * ) 1 ( *
1
1
1
1
1
1
1
1
1
1
1 1
1
0
c ROI k k
k T ROI T T I
k
T T EBIT
k
c ROI
c ROI k
k T ROI T T I
k
T T EBIT
k k
k T ROI T T c ROI I
k
T T EBIT
V
g su su
su c g cg s
su
s c
t
t
su
g
g su
su c g cg s
su
s c
t
t
su su
su c g cg s
t
g
su
s c

,
_

+
+
+

+

+
+
+

,
_

) * (
) ) 1 ( * ( * ) 1 ( *
) 1 (
) 1 ( *
) * ( *
) ) 1 ( * ( * ) 1 ( * ) 1 ( * *
) 1 ( * ) 1 ( *
1
2
1
1
1 2
1
0
c ROI k
k T ROI T c
T
k
T EBIT
c ROI k k
k T ROI T T EBIT c
k
T T EBIT
V
g su
su c g cg
c
su
s
g su su
su c g cg s
su
s c

(10)
21
After calculating governments stake, we can formulate firm value as:

,
_

+ +
+ + +
+

,
_

) * (
)] * ) 1 ( ( * ) ) 1 ( * ( * [ *
) * (
) * (
) ) 1 ( * ( * ) 1 ( *
) 1 (
) 1 ( *
1
2
1
1
2
1
0
c ROI k
T T T k T ROI T ROI c
T T T T
k
EBIT
c ROI k
k T ROI T c
T
k
T EBIT
V
g su
cg S S su C g C g
S C S C
su
g su
su c g cg
c
su
s

(11)
D. Investment Decision
Even though the valuation equations and the numerical values of firms stock prices change with the
addition of various personal taxes, the inequality for the decision to invest or not is still the same with the
addition of new taxes for both fixed payout ratio or investment opportunity set. For example, for a fixed
payout ratio the decision to invest in growth project is affirmative if:
) 1 /( . . ; 0
) 1 ( * ) 1 ( *
) ) 1 ( * ( * ) 1 ( * ) 1 (
) 1 ( * ) 1 ( *
) 1 ( * ) 1 ( *
) ) 1 ( * ( * ) 1 ( * ) 1 (
1
) 1 ( * ) 1 ( *
1 1
c su g
C g su
su c g cg
su
s c
C g su
su c g cg
su
s c
T k ROI again e i
T p ROI k
k T ROI T p
k
T T EBIT
T p ROI k
k T ROI T p
k
T T EBIT
> >



>

,
_

(12)
Thus, we observe that corporate taxes significantly increase the hurdle rate for investments. This
suggests that the firm must now sacrifice projects which have marginal rates of return higher than after-tax
costs of equity but less than pre-tax costs of equity. Corporate taxes causes society at large to lose the
benefit of such projects and these projects along with the flow of capital may be outsourced to countries
with lower tax environments. However, even viable investments that meet hurdle rates in high tax
environments may be moved to lower tax countries because of the incentive of higher returns. Additionally,
since taxes reduce the availability of internally generated funds for reinvestment, viable projects may be
rejected since external equity is more expensive or may not be available.
22
In Panel B of Figure 1 we solve for the minimum required ROI that makes M/B ratio equal to
unity, assuming a fixed payout ratio of 60%. A 40% retention ratio results in additional growth
opportunities and reduces the minimum required ROI. Even so, the damaging effects of taxes and
ameliorating effects of leverage remain similar in the growth case to those in the no growth case. With
taxes as high as 65%, the required minimum ROI is 20% in the absence of leverage, twice the post-tax
return required by shareowners. The use of 60% leverage can reduce the minimum required ROI to 12%.
However, many new, innovative projects, because of risk, may require full equity financing where
leverage is often not an option. Later we show that our proposed tax structure with no corporate taxes
brings the required ROI to very reasonable levels and leverage may allow companies to undertake
projects with a ROI as low as 9%.
II. Corporate versus Personal Tax Structure
We analyze the relative impact of corporate and personal taxes by deriving partial derivatives of
firm value given in equation (9). The partial derivatives with respect to corporate income tax rate, personal
income tax on dividends and on capital gains are given below:
( )
1
1
]
1

2
1
0
) 1 ( * ) 1 ( *
) ( * ) 1 ( *
c g su
su g
C
T ROI k
k ROI EBIT
T
V

;
0
0

S
T
V
;
0
0

CG
T
V
(13)
One can easily notice that
S C
T
V
T
V

<

0 0
=
CG
T
V

0
. Therefore, we can conclude that the aggregate firm
value for all stakeholders is negatively affected by corporate income tax rates while it is unaffected by
personal tax rates, as well as by the realization rate of capital gains.
Next, we focus on the shareowner component of firm value because shareowners directly or
indirectly make the investment decision. The first term in equation (9) indicated shareowners value (SH)
while the second term represented the value of governments stake (G). Partial derivative of shareowners
value with respect to corporate and personal tax rates are as follows:
23

,
_

+ +

2
2 2 2 2
1
)) 1 ( * ) 1 ( * ( *
)) ) 1 ( * ) 1 ( * ) 1 ( * * 2 ( * ) 1 ( * * ( * ) 1 ( *
c g su su
c g c g su su cg su S
C
SH
T p ROI k k
T p ROI T ROI k k p T p k T EBIT
T
V

(14a)

,
_

)) 1 ( * ) 1 ( * ( *
)) ) 1 ( * ( * ) 1 ( * * ( * ) 1 ( *
1
c g su su
su c g cg su c
S
SH
T p ROI k k
k T ROI T p k T EBIT
T
V

(14b)

,
_

)) 1 ( * ) 1 ( * ( *
) ) 1 ( * ( * ) 1 ( * ) 1 ( * ) 1 ( *
1
c g su su
su c g S C
CG
SH
T p ROI k k
k T ROI T T EBIT
T
V

(14c)
Should shareowners be more concerned about corporate taxes or personal taxes? This question may
be answered by taking the difference of expressions (14a) and (14b). To keep the comparison tractable we
first consider the case when all tax rates are equal, i.e. with T
S
=T
C
=T
CG
:
S
SH
C
SH
T
V
T
V

=
2
3
)) 1 ( * ) 1 ( * ( *
) 1 ( * ) 1 ( * *
c g su su
c g
T p ROI k k
T ROI

(15)
The value of equation (15) is always less than zero under the realistic assumptions of

<1, T
c
<1
and k >
) 1 ( * ) 1 ( *
c g
T p ROI
.
Capital gains are taxable only when realized. Thus, a lower effective capital gains tax rate is more
representative of reality. If T
S
=T
C
=2*T
CG
then the difference of derivatives becomes:
S
SH
C
SH
T
V
T
V

=
2
2
)) 1 ( * ) 1 ( * ( *
) 1 ( * ) 2 ( * ) 1 ( * *
c g su su
c C g
T p ROI k k
T T ROI

(16)
The value of equation (16) also is always less than zero under the realistic assumptions of

<1, T
c
<1 and k >
) 1 ( * ) 1 ( *
c g
T p ROI
. Clearly, shareowners value is more sensitive to corporate income tax
rates than personal taxes.
The damaging effect of corporate taxes, in particular, is understood by comparing Lines 5 to 8
presented in Table 1 which progressively introduces corporate and various personal taxes in our numerical
24
analysis. Introduction of 40% corporate taxes in line 6 not only reduces shareowners stake from 150
million to 56 million, but also reduces the total value of the firm from 150 to 119 million. In contrast, the
addition of personal taxes in lines 7 and 8 reduces only shareowners wealth; however, the combined value
for all stakeholders is maintained at 119 million. Note that earnings retention and reinvestment at a 15%
IRR is suboptimal with a high corporate tax rate in lines 6 to 8. Shareowners are better off ignoring growth
opportunities and reverting to corresponding valuation in lines 1-4 where they enjoy both higher
shareowner value and M/B ratios even though the total firm value for all stakeholders is lower at 100
million.
It should be noted that within each Panel (A or B) of Table 1, government controls the tax
environment; however, capital investment decisions are shareowner decisions. Shareowners determine
whether or not firms adopt growth projects (Panel B) or adopt a high dividend, no growth policy (Panel A);
however, their decisions are essentially determined by the tax environment. Thus, government can set the
tax rates within each Panel but if the taxes are too high shareholders will jump from Panel B to Panel A,
which is analogous to outsourcing growth opportunities.
In summary, Table 1 results suggest that in an isolated domestic economy only corporate taxes
matter for capital investment decisions. Since corporate taxes affect after-tax ROI, the only decision is
whether the projects ROI is greater than after-tax cost of capital. In an isolated economy, personal taxes on
dividends are inconsequential for corporate investment decisions because they serve only to reduce after-tax
returns for owners. In an isolated economy stockowners are affected by the same homogeneous personal
tax structure for all investments opportunities, their personal investment choices are unaffected.
In contrast, for firms operating in globally competitive markets and heterogeneous tax
environments, all taxes matter. Shareowners in globally competitive environments must address the
question of the venue where their investments result in the highest M/B ratio. Since personal taxes as well
25
as corporate taxes affect the M/B ratio, investors will select among both individual firms and its tax venue.
We demonstrate this effect graphically in Figure 2, which shows the trade-off between corporate and
personal taxes. Again, assuming a fixed payout ratio of 60%, we plot the required ROI necessary to obtain
the target M/B=1 for given corporate and personal tax rates. The figure shows a much higher impact of
corporate taxes than that of personal taxes. When personal taxes are allowed to range from 0% to 50% in
the absence of corporate taxes, the required ROI increases by merely 2% from 10% to 12%. However,
allowing corporate tax rates to range from 0% to 50% in the absence of personal taxes the required ROI
increases from 10% to 20%. Intuitively, corporate taxes not only affect final cash flows available to the
shareowners (like personal taxes on dividends) but also reduce the cash flow available to exploit growth
opportunities.
[Insert Figure 2 about here]
IV. Intertemporal Model with Growth, Debt and All Taxes
In this section, we allow for the issuance of new debt in the same proportion as new retained
earnings to finance new investments; thereby, maintaining a constant capital structure. Thus, new capital is
comprised of retained earnings S
N
and new issue debt D
N
, where ; I
N
=S
N
+D
N
. For brevity, we omit the cash
flow equations in this section but will make those available to readers upon request. The levered valuation
equation analogous to the unlevered case in equation (9) is divided into three parts representing the three
stakeholders below. First we calculate shareowners stake as:
[ ]
[ ]
( ) [ ] ) 1 ( * ) 1 ( ) ( * *
) 1 )( 1 ( * ) ) 1 ( * ( * ) 1 ( * * * ) 1 ( * ) 1 ( *
) 1 ( * ) 1 ( * ) ( *
1
0 1
0

+
+ +
+
+

C d g g S S
cg S S C g S C C
S
S C D S
T k ROI B ROI k k
T T k T ROI B k T B T EBT
k
T T k k D EBT
V
(17)
where B is debt/equity ratio and EBT is the earnings before taxes but after interest payments.
26
Note that the shareowners have the option to exploit or to relinquish growth projects and revert to
no-growth scenario in equation (1) based on the following inequality constraints.
Condition for accepting new growth project:
( ) 0 ) 1 )( 1 ( * * * > + +
S C g S C
k T B ROI k T B
=>
) 1 ( * ) 1 (
* *
) 1 (
C
C S
C
S
g
T B
T k B
T
k
ROI
+

>
(18a)
Finite limit conditions, as mentioned in previous sections, are:
( ) 0 ) 1 ( * ) 1 ( ) ( * > +
C d g g S
T k ROI B ROI k
=>
) 1 ( * ) 1 (
*
C
S
D g
T
k
k B ROI

+ <

(18b)
In absence of taxes, the inequality holds if growth projects generate a return higher than the cost of
equity. Note that only corporate taxes affect new investment decision and growth projects are accepted only
if its ROI is greater than before tax cost of equity. However, leverage reduces corporate tax effects. Thus,
levered firms, due to gains from leverage, may undertake additional projects due to lower ROIs cutoff in
higher tax environments.
In the intertemporal model, we allow the value of firms outstanding debt to increase in the
proportional amount of new equity investment thereby retaining a constant debt-equity ratio as the firm
grows. However, the value of this debt to debtholders and government depends on the personal tax rate on
debt interest payments. Debtholders stake in the firm is equal to the present value of after personal tax
interest payments discounted at k
d
, and the value of the debt to government is equal to the present value of
personal taxes on interest payments received. Debtholders stake at the time of initial investment will be
equal to:
) 1 ( *
) 1 (
* ) 1 ( *
0
1
0
0 d
N
t
t
d
d d
T D
k
D T k
V
+

(19a)
and governments stake at the time of initial investment will be equal to:
d
N
t
t
d
d d
T D
k
D T k
V *
) 1 (
* ) ( *
0
1
0
0

+

(19b)
27
---------------edited to here 8-20-09----------------------------------
The present value of total after personal tax interest payments to initial and future debtholders is:
( ) [ ]
( ) )] 1 ( * ) 1 ( ) ( * [
) 1 ( * ) 1 ( * *
*
) 1 (
* ) 1 ( ) ( * 1 ) 1 ( * * *
) 1 ( * ) 1 (
* ) 1 ( *
.....
) 1 ( * ) 1 (
) ( * ) 1 ( *
) 1 ( * ) 1 (
) ( * ) 1 ( *
) 1 (
* ) 1 ( *
1
0
1
1
1
0
1
0
3
3 1 0
2
1 0 0

+

+

+
+ +
+

+ +
+
+ +
+
+
+
+
+

C d g g S
c
N
t
t
S
t
C d g g c
N
S D
N
t
t D D
D S
D D
D S
d d
d
d d
Dn
T k ROI B ROI k
T EBT B
S B
k
L T k ROI B ROI T L EBT B
D
k T
D T k
T k
D D D T k
T k
D D T k
k
D T k
V
(19b)
and the present value of total after personal tax interest payments to government initially and in the future
is:
( ) [ ]
( ) )] 1 ( * ) 1 ( ) ( * [
) 1 ( * ) 1 ( * *
*
) 1 (
* ) 1 ( ) ( * 1 ) 1 ( * * *
) 1 ( * ) 1 (
* ) 1 ( *
.....
) 1 ( * ) 1 (
) ( * ) 1 ( *
) 1 ( * ) 1 (
) ( * ) 1 ( *
) 1 ( * ) 1 (
* ) 1 ( *
1
0
1
1
1
0
1
0
3
3 1 0
2
1 0 0

+

+

+
+ +
+

+ +
+
+ +
+
+
+
+
+

C d g g S
c
N
t
t
S
t
C d g g c
N
S D
N
t
t D D
D S
D D
D S
D D
D D
D D
Dn
T k ROI B ROI k
T EBT B
S B
k
L T k ROI B ROI T L EBT B
D
k T
D T k
T k
D D D T k
T k
D D T k
T k
D T k
V
(19b)
Each term above shows the value of debt for existing and future debtholders. Since the company keeps its
debt-equity ratio constant, we assume that the credit risk portion of interest rate will not change in future.
Thus the present value of debtholders and governments stake at the time of issue will be equal to the face
value of issued debt.
28
We also estimate governments stake in a firm. This is the present value of tax revenues from
corporate income, personal income from dividends, capital gains and interest.
( )
[ ]
( ) )] 1 ( * ) 1 ( ) ( * [ *
) 1 ( * ( * )] * ( * ) 1 ( [ * )] ( * [ * ) 1 ( * ) 1 (
* * * ) * ( * ) ( *
1
0 0 1

+
+ + + +
+
+
+ +

C d g g S S
S cg S S s c s c cg cg S g g C
S
S D S C S C D S
GOV
T k ROI B ROI k k
T T T k T T T T T T k ROI B ROI T EBT
k
S B k T T T T T k k D EBT
V
(20)
The first term is the amount of corporate and personal taxes on operating income capitalized at cost
of equity. The second term is the amount of tax on the income generated by the growth project. Finally, the
third term shows the value of the tax shield of debt given back to shareowners by the government.
Continuing with our numerical example, we see that the addition of 10 million in initial debt in Line
9 increases the total firm value to $171 million. M/B jumps further to 3.53 in the absence of taxes because
of higher growth rate of 6.7% in line 9 compared to 6% in Line 5 without leverage. However the
introduction of corporate taxes remains damaging as before in Lines 10 through 14.
V. Tax Incidence: Can Tax Structure Reorganization Boost Growth?
Results in the previous section leads us to analyze the effects of tax incidence on firm growth and
investment where shareowners take most of the risk of new ventures, but if successful, government may
usurp large percentages of equity value through taxation. If the venture is unsuccessful, governments
risk is an opportunity cost; however, the shareowners cost is real. Where corporate taxes are high, these
factors combine to discourage capital investment projects.
11
The burden of corporate taxation eventually falls on shareowners, thus we recommend that most, if
not all, corporate taxation be shifted to individuals instead of the current combination of corporate taxes and
11
According to the CATO Institute, the United States now has one of the highest corporate tax rates among major nations.
The chairman of the presidents Council of Economic Advisers, Glenn Hubbard, believes that from an income tax
perspective, the United States has become one of the least attractive industrial countries in which to locate the headquarters of
a multinational corporation.[See Edwards and de Rugy. 2002].
29
personal taxes on dividends and capital gains. This strategy may be structured to be tax neutral. Lowering
or eliminating corporate taxes frees the engines of corporate growth leading to a win-win situation for all
stakeholders by providing an incentive for corporations to increase capital investment. Reduced corporate
tax rates may result in increased governments tax revenues despite a declining proportional stake in firms.
An effective method of implementing such a strategy is to make both corporate dividends and domestically
reinvested retained earnings tax deductible, while continuing to tax foreign reinvestments. Essentially,
eliminating corporate taxes will increase both corporate growth and job creation thereby increasing personal
income. Higher personal income and higher dividends and capital gains will result in increased tax
revenues.
Firms that do not have real growth opportunities will pay their increased returns as dividend to
investors who will pay personal taxes and could then reinvest in other growth firms. Thus, allowing
corporations to deduct dividends from corporate taxable income will result in higher dividends to
investors and higher immediate personal taxes to government.
Since corporate taxes account for only 15% of U.S. government tax revenues according to
Congressional Budget Office reports
12
, implementation of the reorganized tax structure should be
manageable. Given the likelihood that the growth rates in personal incomes will be somewhat delayed,
reducing or eliminating corporate taxes may temporarily reduce tax revenues but should not have a
gargantuan impact on governments spending ability. Furthermore, in order to ensure that the
governments cash flows do not take a big hit, we recommend that administrative measures be
undertaken to ensure that personal taxes remain the main and perhaps an increasing source of
government tax revenues through growth. For simplicity we assume a flat personal tax rate in our
examples. Currently, Russia has had considerable success with a flat 13 percent personal income tax that
12
Reported by Peter Orszag, Director of Congressional Budget Office, www.cbo.gov/ftpdocs/81xx/doc8116/05-18-
TaxRevenues.pdf
30
has no personal deductions, and many other Eastern European countries have also substantially
increased their revenues by adopting a flat tax system (Grecu, 2004). Therefore, the examples below use
a flat personal tax rate. However, the models main inference is unchanged if we use progressive tax
rates instead of flat tax rates.
Continuing with equation (9), we apply a zero percent corporate tax rate, a 28 percent personal tax
rate on debt interest, dividends, and capital gains. As a result of eliminating corporate taxes, the growth
rate, g, will increase from 3.60% to 6% without leverage and 6.70% for the firm with leverage. As shown
on Line 17 in Table 1, the aggregate value of the unlevered firm is again $150 million up from $119 million
when a 40% corporate tax rate was assumed. With leverage in Line 18 the aggregate value is $174 million.
This scenarios distribution of the firms total stakeholder value results in a shareowners stake of $113
million (up significantly from the $45 million value with suboptimal reinvestment in line 14 or $48 million
with optimized payout ratio in line 8 under the currently existing tax structure and 40 percent corporate
taxes). Debtholders stake is constant at $10 million. Although governments proportionate stake in the firm
falls from 56% under the current tax structure to 30% with our proposed tax structure, the dollar value of
governments stake is much higher with the proposed tax structure at $52 million vis--vis optimized $47
million with current tax structure. Thus, both shareowners and governments stakes rises with our proposed
tax structure. M/B ratio rises to 2.48 in Line 18, much higher than 0.99 in line 14 or 0.95 in line 1. This
again confirms the large negative impact on M/B ratio of high corporate income tax rates and justifies our
tax structure reorganization. It is essential to understand that it is not sufficient to have a higher tax rate to
increase dollar tax revenues. The government needs to make it optimal for businesses to undertake projects
that create income on which taxes can be levied.
Lines 14 and 18 also display the comparison between the domestic and international reinvestment
under our proposed tax structure. Line 14 shows the value of a company which invests overseas and pays
31
corporate and personal taxes over its investment at $126 million, while Line 18 shows that of a company
that invests only domestically at $174 million. The shareowners of the latter company enjoy the zero
corporate taxes that increase their companys value and M/B ratio. Such strong incentives to invest
domestically should immediately reverse some of the massive outsourcing and result in sustainable job
created in the U.S. However, the pure impact of personal income tax rates will depend on where the
shareowners reside and may be less consequential for corporate investment.
VI. Conclusions
Historically, most financial literature considers only two financial stakeholders of the firm,
shareowners and debtholders thereby ignoring the existence of government. We extend Modigliani and
Miller (1958) capital structure model to include government as the third major firm stakeholder. We
posit a conservation of aggregate value and irrelevance of firms tax and capital structures only in
absence of retained earnings and growth opportunities. However, allowing for earnings retention and
growth, tax structure and capital structure substantially affect the magnitude and composition of total
firm stakeholder values and market-to-book ratios for shareowners. Total firm value as well as the value
of each of the three stakeholders increases significantly with a low tax structure.
Although shareowners value is affected both by corporate and personal tax rates, we show that
the impact of corporate taxes is much greater than that of personal taxes. Increasing corporate tax rates
require increasingly higher hurdle rates in the form of minimum ROI of projects; whereas, increasing
personal tax rates has much less impact on hurdle rates. Because the burden of corporate taxation
eventually falls on shareowners, we recommend that most if not all corporate taxation be shifted in a
tax-revenue neutral fashion to shareowners personal taxes instead of the current practice of corporate
taxes and reduced personal tax rates on dividends and capital gains. Allowing corporations to increase
capital investment as a result of reduced corporate taxes increases governments tax revenues despite a
32
declining proportional stake in firms. This tax restructuring strategy will increase growth rates, stock
valuations and capital investments in an economy.
A tactical implementation of proposed tax restructuring can address important economic issues
facing the developed countries. For example, the government should waive corporate taxes only on that
portion of corporate income that is reinvested in new domestic capital investment projects but continue
taxing the corporate earnings used for foreign investments. This will result in higher domestic capital
formation, thereby, creating new higher paying jobs and increasing a firms incentive to retain existing
jobs domestically. Another advantage of shifting the incidence of taxes from corporations to
shareowners in developed countries is that developing countries with lower personal incomes and
compliance rates cannot afford to follow suit because most of them lack a sound system of tracking
individuals and personal incomes. Thus, developing nations will be required to retain corporate taxes,
which will offset their competitive advantages of lower labor costs.
Many countries are already benefiting from low corporate tax environments. In our empirical
analysis of a cross-section of 108 countries from 1991 to 2004, we find that low corporate tax (below
median) environments are associated with 4.3 percent higher GDP growth rates, 0.24 times higher M/B
ratios and 5.2 percent increases in capital investment, compared to high corporate tax environments
(above median taxes). Our time series analysis show that economic growth rates in countries that
reduced marginal tax rates significantly outperformed valuation, and investment rates in countries that
either kept tax rates constant or increased tax rates. Results of our multivariate regression analysis are
consistent with the cross-sectional and time-series analysis with corporate tax rate taking a negative and
statistically significant coefficient in all regression model specifications. A one percent increase in
corporate tax rates results in 0.1 to 0.2 percent decrease in growth rate, 1 to 2 percent decrease in
33
valuation and 0.3 percent decrease in investment. Throughout our empirical analysis we observe that the
effect of personal income taxes is less significant than that of corporate taxes.
The recent growth in low tax and zero income tax developing economies perhaps creates the
most compelling argument for governments in developed economies to restructure corporate taxes.
Until recently, few economies have provided significant incentives for reincorporating. However, given
the choice of remaining in a high tax country with a high government stake or reincorporating in a more
tax favorable location with a low or zero government stake, many multinational firms may choose to
relocate. Thus adopting a lower corporate income tax structure may be critical for the future viability of
developed countries economies.
34
FIGURE 1. Hurdle Rate (Required ROI to obtain target M/B=1) with varying tax environments and
firm leverage ratios.
We capture the combined effects of corporate and personal taxes on x-axis using the expression 1-(1-Tc)*(1-Ts),
where Tc is corporate income tax rate and Ts is personal income tax rate on dividends. Leverage shows the different
possible Debt/Total Assets levels for a company. Shareowners required rate of return after taxes, Ksu, is 10%. Panel
A has 100% payout ratio and no growth whereas Panel B assumes 60% payout ratio resulting in reinvestment and
growth. Panel C presents the trade-off between corporate and personal taxes separately without any leverage.
Panel A: 100% payout ratio and no growth Panel B: 60% Payout ratio results in growth
75%
65%
55%
45%
35%
30%
25%
20%
15%
10%
0%
0%
20%
30%
40%
50%
60%
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
35.00%
40.00%
R
e
q
u
i
r
e
d

R
O
I
1-(1-Tc)(1-Ts)
Leverage
RequiredROI for target M/B=1
Panel C: Corporate versus Personal Taxes
6
5
%
6
0
%
5
5
%
4
8
%
4
1
%
3
4
%
3
0
%
2
2
%
1
6
%
1
0
%
0 %
0
%
20
%
30
%
40
%
50
%
60
%
0
%
5
%
10
%
15
%
20
%
1-(1-Tc)(1-
Ts)
Leverag
e
Required ROI for target M/B=1
35
0
%
1
0
%
2
0
% 3
0
% 4
0
%
0
% 5
%
1
0
%
1
5
%
2
0
%
2
5
%
3
0
%
3
5
%
4
0
%
4
5
%
5
0
%
0%
5%
10%
15%
20%
25%
R
e
q
u
i
r
e
d

R
O
I
Corporate Taxes Personal Taxes
Required ROI for M/B=1
36
Table 1: Simulated Numerical Example of Theoretical Stakeholders Value under various Tax Structures
This table shows the shareowners' value, debtholders' value and government's stake under various tax structures. All columns are based on a firm starting with a investment of
55.56 million in year 0. ROI is assumed to be 18% on this project resulting in EBIT of $10 million in year 1. Cost of equity is 10%. Lines 1 through 4 in Panel A assume
absence of any new growth opportunities so dividend payout ratio is 100% whereas Lines 5 onwards assume that new growth projects are available that offer IRR of 15%.
Panel B assumes fixed dividend payout ratio of 60%. The capital structure, tax rates, and growth rates vary across models. When firms are modeled as unlevered firms, they
have no debt. When firms are modeled as levered, they have $10 million face value debt that pays 6% coupon. Tc is corporate income tax rate, Ts is personal income tax rate
on dividend income, Td is personal income tax rate on interest income from debt, and Tcg is effective personal income tax rate on capital gains. We assume that half of the
capital gain is realized and only realized gains are taxable. M/B is the market to book ratio of equity. All values are given in million dollars and can be calculated from the
most generalized form of our model given in equations 18 to 20. The numbers in parentheses indicate the percentage of each stakeholders value in total firm value for
growing firms in lines 5 through 15. Percentages are same as dollar values in lines 1 through 8. Panel C assumes fixed investment opportunity set and Panel D presents our
recommended tax policy. Displayed total firm values are rounded to closest whole number and may appear slightly different from the sum of the three stakeholder values.
Line
Shareowners'
value
Debtholders'
value
Governments
stake
Total firm
value M/B Tc Ts Td Tcg
Growth
rate
Panel A. No New Growth Opportunities
1 Corporate tax and tax on dividends and interest 45.9 7.2 46.9 100 1.008 40% 15% 28% - 0.00%
1a Corporate tax and tax on dividends (unlevered) 51 0 49 100 0.92 40% 15% - - 0.00%
2 Corporate tax only 54 10 36 100 1.19 40% 0% 0% - 0.00%
3 No Taxes 90 10 0 100 1.98 0% 0% 0% - 0.00%
4 Proposed tax structure 64.8 7.2 28 100 1.42 0% 28% 28% - 0.00%
Panel B. With New Growth Opportunities and Fixed Payout Ratio
Unlevered firm
5 No Taxes Optimized Reinvestment 150 (100) 0 0 150 2.70 0% 0% 0% 0% 6.00%
6 Corporate tax only (suboptimal to line 2) 56 (47) 0 63 (53) 119 1.01 40% 0% 0% 0% 3.60%
7
Corporate tax and tax on dividends (suboptimal
to line 1a) 48 (40) 0 71 (60) 119 0.86 40% 15% 0% 0% 3.60%
8
Corporate tax and tax on dividends and on
capital gains (suboptimal to line 1a) 48 (40) 0 71 (60) 119 0.86 40% 15% 0% 8% 3.60%
Levered firm:
9 No Taxes Optimized Reinvestment 161 (94) 10 (6) 0 171 3.53 0% 0% 0% 0% 6.70%
10 Corporate tax only (suboptimal to line 2) 53 (43) 10 (8) 61 (49) 123 1.16 40% 0% 0% 0% 3.99%
11
Corporate tax and tax on dividends (suboptimal
to line 6) 45 (37) 10 (8) 68 (55) 123 0.99 40% 15% 0% 0% 3.99%
12 Corporate tax and tax on interest 53 (42) 10 (8) 63 (50) 126 1.16 40% 0% 28% 0% 3.99%
13 Corporate tax and tax on dividends and interest 45 (36) 10 (8) 71 (56) 126 0.99 40% 15% 28% 0% 3.99%
37
(suboptimal to line 7)
14
Corporate tax and taxes on dividends, interest,
and capital gains (suboptimal to line 8) 45 (36) 10 (8) 71 (56) 126 0.99 40% 15% 28% 8% 3.99%
Panel C. With New Fixed Dollar Investment Growth Opportunities offering 15% IRR
Unlevered firm
15 No Taxes 150 (100) 0 0 150 2.70 0% 0% 0% 0% 6.00%
16a Corporate tax only Suboptimal Reinvestment 50 (33) 0 100 (67) 150 0.90 40% 0% 0% 0% 6.00%
16b Corporate tax only Optimized Reinvestment 60 (60) 0 40 (40) 100 1.08 40% 0% 0% 0% 0.00%
Panel D. Our Recommendations: Tax Neutral Shift from Corporate to Personal Taxes
Unlevered firm
17 Taxes on dividends and capital gains 103 (69) 0 47 (31) 150 1.85 0% 28% 28% 14% 6.00%
Levered firm:
18
Taxes on dividends, interest, and on capital
gains 113 (65) 10 (5) 52 (30) 174 2.48 0% 28% 28% 14% 6.70%
38
Table 2. Empirical descriptive statistics for Corporate and Personal Tax rates
Here we show the tax rates for each country in the sample for the years in which our sample begins and ends.
Country Starting year Corporate tax Personal Tax Ending year Corporate Tax Personal Tax
Antigua 1993 40.0 0 (1998) 2000 40.0 0.0
Argentina 1992 30.0 30.0 2004 35.0 35.0
Australia 1991 39.0 48.3 2004 30.0 48.5 (2001)
Austria 1991 30.0 50.0 2004 34.0 50.0
Azerbaijan 2002 27.0 35.0 2004 27.0 35.0
Bangladesh 1991 45.0 45.0 2001 35.0 25.0
Barbados 1991 35.0 51.5 2002 37.5 40.0
Belgium 1991 39.0 55.0 2004 40.2 53.0
Bolivia 1994 25.0 10.0 2004 25.0 13.0
Botswana 1991 40.0 40.0 2004 25.0 25.0
Brazil 1991 40.0 25.0 2004 34.0 27.5
Bulgaria 2001 20.0 38.0 2004 15.0 29.0
Cambodia 1995 20.0 20 (1997) 2004 20.0 20 (1998)
Canada 1991 28.8 25.2 2004 26.2 22.3
Chile 1991 15.0 50.0 2004 16.0 43.0
China 1991 30.0 22.5 2004 30.0 45.0
Colombia 1991 30.0 30.0 2004 35.0 35.0
Congo, Dem. Rep. 2002 40.0 - 2004 40.0 -
Costa Rica 1991 30.0 15.0 2003 30.0 15.0
Croatia 1995 25.0 35.0 2004 20.0 35.0
Cyprus 1991 25.0 40.0 2004 25.0 40.0
Czech Republic 1994 42.0 44.0 2004 31.0 31.0
Denmark 1991 38.0 34.0 2004 30.0 26.5
Dominica 1991 35.0 40.0 1998 30.0 40.0
Dominican Republic 1992 30.0 30.0 2002 25.0 25.0
Ecuador 2002 25.0 25.0 2004 25.0 25.0
Egypt 1992 42.0 65.0 2004 42.0 32.0
Estonia 1996 26.0 26.0 1999 26.0 26.0
Fiji 1991 37.5 42.5 2001 32.0 32.0
Finland 1991 23.0 39.0 2004 29.0 37 (2001)
France 1991 34.0 57.9 2004 34.3 60.4 (2001)
Germany 1991 50.0 53.0 2004 26.4 51.2
Ghana 1991 50.0 50.0 1997 35.0 35.0
Greece 1991 35.0 50.0 2004 35.0 40.0
Grenada 1992 40.0 25.0 1996 30.0 30.0
Guatemala 1993 25.0 25.0 2004 31.0 31.0
Hong Kong 1991 16.5 25.0 2004 16.0 17.0
Hungary 1991 40.0 50.0 2004 18.0 40.0
Iceland 1991 45.0 32.8 2004 18.0 32.3
India 1991 46.0 50.0 2004 35.7 30.0
Indonesia 1991 35.0 35.0 2004 30.0 35.0
Iran 1992 54.0 54.0 2004 25.0 35.0
Ireland 1991 40.0 52.0 2004 12.5 42.0
Israel 1993 39.0 50.4 2004 36.0 50.5
Italy 1991 36.0 50.0 2004 35.0 45.0
Jamaica 1993 33.3 25.0 2003 33.3 25 (2001)
Kazakhstan 1996 30.0 40.0 2003 30.0 30 (2001)
Kenya 1991 40.0 45.0 2004 30.0 30.0
Korea 1991 34.0 50.0 2004 27.0 36.0
Kuwait 1993 55.0 0.0 2004 55.0 0.0
Kyrgyzstan 1996 30.0 40.0 1997 30.0 40.0
Laos 2003 35.0 . 2004 35.0 -
39
Latvia 1996 25.0 25.0 2004 22.0 25.0
Libya 1991 60.0 90.0 1998 60.0 90 (1997)
Lithuania 1996 29.0 33.0 2004 15.0 33.0
Luxembourg 1992 33.3 51.3 2004 22.9 38.9
Malawi 1991 40.0 40.0 - - -
Malaysia 1991 38.0 35.0 2004 28.0 28.0
Malta 1997 35.0 35.0 2004 35.0 35.0
Mauritius 2002 25.0 25.0 2003 25.0 25.0
Mexico 1991 35.0 35.0 2004 34.0 40 (2001)
Morocco 2002 35.0 . 2004 35.0 -
Mozambique 2002 35.0 . 2003 35.0 -
Myanmar 1995 30.0 30.0 2001 30.0 30.0
Netherlands 1991 40.0 60.0 2004 34.5 52.0
New Zealand 1991 33.0 33.0 2004 33.0 39 (2001)
Nigeria 1991 40.0 55.0 2001 32.0 25.0
Norway 1991 27.8 13 (1992) 2004 28.0 19.5
Oman 1991 50.0 0.0 2003 30.0 0.0
Pakistan 1991 49.5 35.0 2004 35.0 35.0
Panama 1991 50.0 56.0 2004 30.0 33.0
Papua New Guinea 1991 30.0 45.0 2004 25.0 47.0
Paraguay 1991 30.0 0.0 2002 30.0 0.0
Peru 1993 30.0 37.0 2004 27.0 27.0
Philippines 1991 35.0 35.0 2004 32.0 32.0
Poland 1991 40.0 40.0 2003 24.0 40.0
Portugal 1991 36.0 40.0 2004 25.0 40.0
Qatar 2002 35.0 0.0 2003 35.0 0.0
Romania 1993 45.0 60.0 2001 25.0 40.0
Russia 2002 11.0 . 2004 11.0 -
Saudi Arabia 1991 45.0 0.0 2004 30.0 0.0
Senegal 1991 35.0 48.0 2004 35.0 50 (2001)
Singapore 1991 31.0 31.4 2004 24.0 23.4 (2001)
Slovak Republic 1995 40.0 42.0 2004 19.0 19.0
Slovenia 1993 30.0 50 (1994) 2004 25.0 50.0
Solomon Islands 1991 35.0 42.0 2002 30.0 40.0
Spain 1991 35.0 56.0 2004 35.0 32.2
Sri Lanka 1991 50.0 40.0 2004 35.0 35.0
St. Lucia 1991 33.3 30.0 2004 33.3 30 (1999)
St.Vincent & Grenadi 1991 45.0 55.0 2001 40.0 40 (1997)
Sudan 1993 45.0 45.0 1997 40.0 30.0
Sweden 1991 30.0 20.0 2004 28.0 25.0
Switzerland 1991 9.8 13.2 (1998) 2004 8.5 13.2
Tanzania 1991 45.0 40.0 2004 30.0 30.0
Thailand 1991 30.0 50.0 2004 30.0 37.0
Trinidad &Tobago 1991 40.0 35.0 2004 35.0 35.0
Turkey 1991 49.2 50.0 2004 33.0 40.0
Uganda 1991 40.0 50.0 2003 30.0 30.0
Ukraine 2001 30.0 40.0 2004 30.0 40.0
United Kingdom 1991 33.0 40.0 2004 30.0 40.0
United States 1991 39.0 31.0 2004 39.0 30.0
Uruguay 1993 30.0 0.0 2004 30.0 0.0
Venezuela 1991 30.0 30.0 2004 34.0 34.0
Vietnam 1993 25.0 50.0 2004 32.0 60 (2001)
Zambia 1991 45.0 50.0 1997 35.0 30.0
Zimbabwe 1993 42.5 50.0 2000 35.0 40.0
40
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