Legal Commentary

Over at Conglomerate this week, they're discussing Heather Field's fine and ambitious new paper, "Checking in on Check the Box."  One of the many tough questions Heather takes on is whether there should be a separate layer of tax for entities -- that is, whether we should tax corporations at all.  (In contrast, partnerships and certain small corporations are generally not taxed directly -- their equity holders pay tax as individuals on their share of profits).  Corporate tax is complicated, as the intricacy of Heather's other arguments shows, and most economists would tell you the corporate tax inefficiently influences business decisions.  So why bother?  It's hard to improve on the work Reuven Avi-Yonah has done on this, but let me throw out a couple of other possibilities.

(Ok, this is tax greek central, but you'll find it strangely interesting, I promise.  Go ahead and click for more...)

One reason I see is precisely to influence business decisions.  If, as seems likely, there's slack in shareholder control over managers, the managers won't be fully concerned with individual-level taxes.  This suggests that, if we want to use tax as a corporate regulatory tool with maximal effectiveness, we need a corporate tax.  For example, one might think of the entire regime of the federal law of nonprofit organizations as a corporate regulatory tool that can exist only because of the threat of a corporate tax for noncompliance.  It's possible that the welfare gains from using tax as market-failure corrective, rather than the second-best regulatory regime exceed the welfare losses of the corporate tax.

Next, and sticking with efficiency, consider corporate-form neutrality.  (This point is inspired by Chris Sanchirico's work on "carried interest").  Our tax system doesn't count as income goods and services that a person -- or an entity -- provides to herself or itself.  If Beyonce sings in the shower, she doesn't have to pay tax on the price of a front-row ticket.  When integrated firms exchange information, pass a product along from factory to retailer, or do their own books, they (generally speaking) don't report any of that value as income.  The value does get taxed later, as corporate revenue, but revenue gains often arise long after the value was first generated.  This means there is a tax advantage -- the time value of this implicit income -- in integrating the function, rather than contracting with a third part.  Tax therefore may distort the basic Coasian decision whether to contract or incorporate.  The corporate tax should, at a minimum, be set at a level that would leave firms tax-indifferent between the two choices.   

But, as Larry Solum would say, read Field!  (Also, I admit, this post wasn't strangely interesting.  But was the Beyonce example at least a little funny?  Funny for tax?)