The Nature of Corporate Income Tax Under a Full Imputation Tax Regime: A Test of Functional Fixation

This paper tests two competing hypotheses describing investors' behavior: the efficient market hypothesis and the functional fixation hypothesis. In particular, this study examines how Taiwan's stock market interprets the nature of corporate income tax after the 1998 Tax Reform, which switches from the classical tax system to the integrated tax system. This Tax Reform changes the nature of corporate income tax from a pure operating expense to an individual shareholder's tax credit, but current GAAP still treats it as an operating expense in the income statement. The empirical results show that Taiwan's stock market perceives the change in nature of corporate income tax and responds accordingly.