The United States generally imposes two levels of federal income tax on corporate profits. The first level taxes income to the corporation; the second level taxes dividends to the shareholders. Academics and policymakers have long considered this double tax to be “unusual, unfair, and inefficient.” Legislators from both political parties have proposed integration of the corporate and individual income taxes on many occasions, but the proposals consistently fail. Prior academic analyses have struggled to explain the failure of integration. This paper demonstrates how certain managers, shareholders, and collateral interests rationally favor certain integration proposals and oppose other integration proposals, while other managers, shareholders, and collateral interests rationally adopt contrary positions. The substantial heterogeneity of interests among managers, shareholders, and collateral interests generally accounts for the stubborn persistence of the double tax. Close examination of the lobbying positions taken by managers, shareholders, and collateral interests in response to the Bush Administration’s dividend-exclusion proposal establishes that the heterogeneity of interests directly shapes the legislative process and definitely affects legislative outcomes. The argument presented here implies that, as a political matter, the corporate double tax is much more entrenched than most prior analyses assume.
Article
The Antitrust of Reputation Mechanisms: Institutional Economics and Concerted Refusals to Deal
An agreement among competitors to refuse to deal with another party is traditionally per se illegal under the antitrust laws. But coordinated refusals to deal are often necessary to punish wrongdoers, and thus to deter undesirable behavior, that state-sponsored courts cannot reach. When viewed as a mechanism to govern transactions and induce socially desirable cooperative behavior, coordinated refusals to deal can sustain valuable reputation mechanisms. This paper employs institutional economics to understand the role of coordinated refusals to deal in merchant circles and to evaluate the economic desirability of permitting such coordinated actions among competitors. It concludes that if the objective of antitrust law is to promote economic welfare, then per se treatment—or any heightened presumption of illegality—of reputation mechanisms with coordinated punishments is misplaced.
The Space Between Markets and Hierarchies
The decision to pool production within a firm raises a fundamental tension for corporate law scholars. On the one hand, channeling activity into a centralized entity can economize on transaction costs by replacing the hassles of arms-length contracting with managerial discretion. Instead of attempting to write a complete contract to insulate against counterparty opportunism, firm managers retain the control necessary to make optimal decisions later—if and when a potential contingency arises. On the other hand, agency costs and production costs may be somewhat higher when business is conducted within a firm—because the activity is walled off from the relentless pricing pressure that comes with well-functioning markets. Recent work in the legal academy also shows how intra-firm activity can result in suboptimal capital structures for a given collection of assets. As the story goes, the precise location of a firm’s borders at any point in time will be the result of a mindful balancing between these competing effects.
Yet this account has always been somewhat misleading: there is space between markets and hierarchies. Business alliances, joint ventures, franchise agreements, and other structures offer firms a middle path between market exchange and unconditional firm control. Furthermore, the recent rise in business outsourcing transactions presents another intriguing context for studying hybrid organizational structures. Under many of these arrangements, assets (both physical and intangible) are legally owned by an offshore vendor, but the use of these assets is subject to partial control rights retained by the operational client.
This Article explores the growth of business outsourcing, how it works, and why two firms might logically enter into an outsourcing arrangement not only to cut production costs—but also to craft a sensible governance compromise. It also asks, more generally, whether increased diversity of organizational structures is starting to provide firms with a richer menu of strategies for sharing operational risk—in the same way that recent innovations in corporate finance and capital markets are dramatically altering ownership strategies on the right side of the balance sheet.