Abstract
While generally the impact tax has on patterns of corporate ownership and control has received little attention, this paper argues that tax is potentially an important determinant of ownership patterns in large companies. The paper focuses mainly on historical developments in Britain, where an “outsider/arm’s-length” system of corporate governance began to take shape in the years leading up to World War I and became fully entrenched by the end of the 1970s. Taxes imposed on corporate profits, taxation of managerial and investment income and inheritance taxes do much to explain why during this period blockholders sought to exit and why there was sufficient demand for shares among investors to permit ownership to separate from control. The paper also discusses developments in the United States and argues that tax helped to foster the separation of ownership and control that reportedly occurred in larger American companies after World War I.
A revised analysis of developments in the U.K. discussed in this chapter appears in CHEFFINS/BANK, Corporate Ownership and Control in the U.K.: The Tax Dimension, 70 Modern Law Review 778 (2007).
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References
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PARKINSON, Scientific, supra note 12, at 199. The tax burden was alleviated still further by permissible tax deductions. For instance, amounts companies paid as managerial remuneration were deductible in calculating taxed profits but dividends were not. This distinction potentially mattered greatly for smaller companies — various rules were introduced with the express intention of precluding smaller companies from distributing profits in the form of managerial salaries — STANLEY, “Basic Rules Prescribing a Director’s Pay”, Times, March 3, 1969, 22. The distinction, however, was of limited significance for larger companies since revenues typically dwarfed managerial salaries.
On the 1920s and 1930s, see BANK, Dividend, supra note 35, at 11–12; THOMAS, The Finance of British Industry 1918–1976, 89 (Table 4.2) (1978). On the 1950s, the average for the decade was calculated on the basis of annual figures set out in ROYAL COMMISSION ON THE DISTRIBUTION OF INCOME AND WEALTH, Report No. 2: Income from Companies and its Distribution, 161, Table P7 (1975). On the 1960s and 1970s, see TOMS/WRIGHT, Corporate Governance, Strategy and Structure in British Business History, 1950–2000, 44 Business History 91, 105 (2002).
For data on the standard rate, see PARKINSON, Scientific, supra note 12, at 208 (1920s and early 1930s); “Proposed Changes in Taxation”, Times, April 27, 1938, 10 (reporting an increase in the standard rate of taxation from 30% to 35%); THOMAS, Finance, supra note 37, at 230 (Table 8.4) (1947–48 to 1975–76).
DAUNTON, Just Taxes: The Politics of Taxation in Britain, 1914–1979, 41, 55–57 (2002). “Excess profit” was defined as an increase over the profit of the three years before the war or above 6% on prewar capital.
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HAIG, British Experience With Excess Profits Taxation, 10 American Economic Review, Papers and Proceedings of the Annual Meeting of the American Economic Association, 1, 6–7 (1920).
HAIG, id., at 9.
DAUNTON, How to Pay for the War, supra note 40, at 901.
TUCKER, The British Finance Act, 1920, 35 Quarterly Journal of Economics 167, 170 (1920).
“The End of E.P.D.”, Times, February 4, 1921, 11.
“City Notes; Important New Issues; The Corporation Tax”, Times, March 1, 1921, 18.
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Id.; “Lighter Burden of Taxes; Appeal by F.B.I. to Government”, Times, Jan. 31, 1923, 7.
See, e.g., “Company Meetings: The Costa Rica Railway Company, Limited”, Times, July 20, 1921, 19; “City Notes; Important New Issues; The Corporation Tax”, Times, March 1, 1921, 18. Labour’s Hugh Dalton called the tax “especially objectionable, discriminating against ordinary shareholders in joint-stock companies as compared with other property owners, and discouraging, in a specially high degree, the taking of business risks.” DAUNTON, How to Pay for the War, supra note 40, at 914.
“Company Meetings”, supra note 52.
DAUNTON, How to Pay for the War, supra note 40, at 914 (calling the tax’s yield “disappointing”); “Lighter Burden of Taxes; Appeal by F.B.I. to Government”, Times, Jan. 31, 1923, 7 (noting that while it was originally estimated that the tax would yield £50 million annually, the actual yield was only £17.5 million at its height).
ALDCROFT, The British Economy, Volume 1: The Years of Turmoil 1920–1951, 6 (1986).
An alternative explanation for the reduced revenues from the C.P.T. is that the tax was “easily evaded” because of the ability to reclassify profit as something else. HICKS et al., The Taxation of War Wealth, supra note 41, at 90.
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DAUNTON, Just, supra note 39, at 173; FARNSWORTH, Some Reflections upon the Finance Act 1937, 1 Modern Law Review 288, 290–91 (1938).
“Industry and War Taxation”, Times, September 28, 1945, 2.
SAYERS, Financial Policy 1939–45, 40, 86, 88–89, 118–19 (1956).
SPICER, Excess Profits Tax and National Defence Contribution, 109 (1940).
A concession was made available for businesses with fluctuating profits, but this provision was “bitterly criticized” since relief was only offered up to the point where a company could satisfy its obligations to pay interest on its debts, satisfy its preferred dividend obligations and distribute a 6% dividend for ordinary shareholders (8% in the case of director-controlled companies): Hicks et al., supra note 41, at 96.
SAYERS, Financial, supra note 60, at 122; FARNSWORTH, The Finance Act, 1941, 5 Modern Law Review 128, 132 (1941).
SAYERS, Financial, supra note 60, at 164, 172–74 (discussing the work done by the capital issues committee struck by the Treasury); MICHIE, The London Stock Exchange: A History, 314 (1999) (of securities quoted on the London Stock Exchange between 1941 and 1945, 86% by value were issued by the British government).
GRANT, A Study of the Capital Market in Britain From 1919–1936, 161–62 (2nd ed. 1967); KYNASTON, The City of London: Volume III, Illusions of Gold 1914–1945, 421 (1999). Blockholders wanting to carry out a placing during World War II without confronting Stock Exchange constraints could tap a “grey market” where shares were sold “off market”: SAYERS, Financial, supra note 60, at 178–79; “Black Markets and Grey”, Times, November 19, 1943, 9.
Finance Act 1946, s. 36.
On the “grey market” agreement, see SAYERS, Financial, supra note 60, at 179–80. On the backlog, see “Fresh Ruling on New Issues”, Times, April 5, 1945.
On conditions after the war ended, see THOMAS, Finance, supra note 37, at 146–48; “New Issue Boom Goes On”, Times, July 23, 1947, 8; “‘The Times’ Book of New Issues”, Times, June 24, 1949, 9; ROGOW, The Labour Government and British Industry 1945–1951, 27–29 (1955).
TURNER, Business, supra note 33, at 59–60; LITTLEWOOD, The Stock Market: 50 Years of Capitalism at Work, 122 (1998).
DAUNTON, Just, supra note 39, at 200–1.
For a year-by-year breakdown of the differential, see THOMAS, Finance, supra note 37, at 230; KING, Public Policy and the Corporation, 258 (1977).
DAUNTON, Just, supra note 39, at 249; BANK, Dividend, supra note 35, at 37; RUBNER, The Ensnared Shareholder: Directors and the Modern Corporation, 191–93 (1965); see also ROYAL COMMISSION ON THE TAXATION OF PROFITS AND INCOME, Final Report, Cmnd. 9474, 158–59 (1955) (explaining rather than agreeing with the policy justifications).
On the 1958 change, see DAUNTON, Just, supra note 39, at 252–53; BANK, Dividend, supra note 35, at 41.
701 Parl. Deb., H.C. (5th Ser.) (1964) 1041 (statement of Mr. Callaghan). For further background on the rationale underlying the change, see DAUNTON, Just, supra note 39, at 291–92; THOMAS, Finance, supra note 37, at 233–34.
KAY/ KING, supra note 35, at 188.
Trevor v. Whitworth, 12 App. Cas. 409 (1887) (establishing the common law rule prohibiting the repurchase of shares); Companies Act 1981, c. 62, ss. 45–62 (authorizing share buy-backs under prescribed circumstances).
See RUBNER, The Irrelevance of the British Differential Profits Tax, 74 Economic Journal 347 (1964) (abolition of the differential profits tax had no impact on dividend-profits ratios); FELDSTEIN, Corporate Taxation and Dividend Behaviour, 37 Review of Economic Studies 57 (1970) (the U.K.’s differential profits tax had an effect on corporate saving and dividends); BRISTON/TOMKINS, The Impact of the Introduction of Corporation Tax upon the Dividend Policies of United Kingdom Companies, 80 Economic Journal 617 (1970) (the introduction of the classical corporate tax system in the U.K. in 1965 was not a significant factor in determining dividend policy). For studies covering from 1950 through the 1970s, compare POTERBA/ SUMMERS, The Economics Effect of Dividend Taxation, in: ALTMAN/SUBRAHMANYAM (eds.), Recent Advances in Corporate Finance (1985) (dividend taxes affected the dividend policy of U.K. public companies); BANK/CHEFFINS/GOERGEN, Dividends and Politics, unpublished working paper (2004) (not finding a statistically significant correlation between tax and dividend policy).
KAY/ KING, supra note 35, at 51.
See MERRETT, Executive Remuneration in the United Kingdom, 33, 38 (1968) (of 51 executive directors interviewed for a survey on executive pay in the U.K., 19 were probably blockholders, as 13 were categorized as “self made” and 6 were categorized as “inherited”. On average, the marginal tax rate was 76% for “self-made” executives and 69% for “inherited” executives.).
For a nutshell history of “super tax”, see LEWIS, British Tax Law — Income Tax: Corporation Tax: Capital Gains Tax, 14 (1977).
COMSTOCK, British Income Tax Reform, 10 American Economic Review 488, 496 (1920). For numerical illustrations, see DAUNTON, Just, supra note 39, at 47 (setting out income tax rates and allowances for 1913/14 and 1918/19); CAUDWELL, A Practical Guide to Investment, 10–11 (1930) (providing a table of income tax payable on earned and investment income with total incomes of between £135 and £150,000).
For instance, while as of 1930, £32 2s 6d was taxed on £500 of earned income and £50 17s 6d was taxed on £500 of unearned income, the corresponding figures for £5,000 were £1,313 7s 6p (earned) and £1,369 12s 6p (unearned): CAUDWELL, Practical, supra note 82, at 10–11.
PLUNKETT/ NEWPORT, Income Tax: Law and Practice, 394–95 (29th ed. 1961).
PLUNKETT/ NEWPORT, id., at 30.
Derived from ROYAL COMMISSION ON THE DISTRIBUTION OF INCOME & WEALTH (Lord Diamond, chairman), Report No. 2: Income from Companies and its Distribution, Cmnd. 6172, 23, 27 (1975).
COMSTOCK, British, supra note 82, at 497.
DAUNTON, Just, supra note 39, at 47 (Table 2.5).
DAUNTON, id, at 133.
Extrapolated from “The Budget”, Times, April 15, 1930, 11.
Extrapolated from “War Budget/Proposed Changes in Taxation”, Times, September 28, 1939, 4.
For income tax and surtax rates throughout World War II, see ROGOW, Taxation and ‘Fair Shares’ Under the Labour Government, 21 Canadian Journal of Economics and Political Science 204, 204–5 (1955).
SAYERS, Financial, supra note 60, at 49; SHIRRAS/ROSTAS, The Burden of British Taxation, 26–27, 72 (1942).
As Hugh Dalton, Chancellor of the Exchequer, explained in Parliament in 1946, an “awakened and war scarred generation” was demanding the government “close from both ends the gap which separates the standard of living of the great mass of our fellow citizen from that of a small privileged minority”: quoted in FIJALKOWSI-BEREDAY, The Equalizing Effect of the Death Duties, 2 Oxford Economic Papers (N.S.) 176, 177 (1950).
“Tax Changes”, Times, October 24, 1945, 7; “Surtax Increased”, Times, October 24, 1945, 7.
See http://www.ifs.org.uk/ff/income.xls (individual tax rates, 1973–74 to 2005–2006). The one exception was the 1973 tax year, when the top marginal rate was set at 75%.
On the position prior to the early 1960s, see ROSE, The Economic Background to Investment, 335 (1960). On the change to the law, see Finance Act 1965, c. 25, ss. 19, 20, 22.
SPOLIANSKY/ BUCKLEY, Practice and Procedures for Takeovers in England, 28 Business Lawyer 63, 74–75 (1972–73).
FRANKS/ HARRIS/ MAYER, Means of Payment in Takeovers: Results for the United Kingdom and the United States, in: AUERBACH (ed.), Corporate Takeovers: Causes and Consequences, 221, 236 (1988). “All equity” takeovers were highly conducive to separating ownership from control since not only would blockholders in the target exit but if the acquiring company had blockholders, their stake would typically be diluted as part of the deal since the company would be issuing new shares to finance the acquisition. See, for example, FRANKS/ MAYER/ROSSI, Spending Less Time with the Family: The Decline of Family Ownership in the United Kingdom, in: MORCK, History, supra note 5, at 581, 600–1; “Cadbury Shares over 83s in Heavy Trading”, Times, January 30, 1969, 17 (discussing how the 1969 merger of Cadbury Ltd., a chocolate manufacturer, with Schweppes, a drinks company, diluted the percentage of shares owned by the families controlling Cadbury).
NELSON-JONES, “Unremitting Search for Surtax Relief”, Times, July 1, 1972, 22; KAY/ KING, supra note 35, at 51, 55.
TITMUSS, Income Distribution and Social Change, 167 (1962) (saying that in 1959–60 life assurance relief cost the government £49 million, about one-seventh of which was received by the top 1% of taxpayers).
WHEATCROFT, The Attitude of the Legislature and the Courts to Tax Avoidance, 18 Modern Law Review 209, 210–11 (1955).
ROSE, Economic, supra note 97, at 306; ARMSTRONG, The Book of the Stock Exchange, 248 (5th ed. 1957). On the “pregnant with dividend” metaphor, see MONROE, Intolerable Inquisition? Reflections on the Law of Tax, 74 (1981).
This could occur because public companies customarily closed their transfer registers on a specified date shortly before a dividend payment and would not reopen their books until the dividend had in fact paid out: ROSE, Economic, supra note 97, at 306; ARMSTRONG, Book, supra note 103, at 244; NAISH, The Complete Guide to Personal Investment, 20 (1962).
ROYAL COMMISSION ON THE TAXATION OF PROFITS AND INCOME, Final Report, Cmd. 9474, 369 (minority report) (1955); BEATTIE, Elements of the Law of Income and Capital Gains Taxation, 236 (9th ed. 1970); HOSKING, Pension Schemes and Retirement Benefits, 170 (1956).
If there was an agreement at the time of sale that the taxpayer would repurchase the shares, the payment of dividends was treated as income of the seller. See Income Tax 1952, s. 203, which was enacted in 1937. See PLUNKETT, The Income Tax Act 1952, § 203 (1952); PLUNKETT/NEWPORT, Income Tax: Law and Practice, 223 (29th ed. 1961).
Finance Act 1961, s. 28; for analysis see TAPPER, Finance Acts, 1961 and 1960, 25 Modern L. Rev. 64 (1962); POTTER, A Counterblast to Tax-Free Profits, 1960 British Tax Review 248, 259–67.
FLETCHER, Retrospective Fiscal Legislation, 1959 British Tax Review 412, 424 (discussing revenue lost); ROYAL COMMISSION ON THE TAXATION OF PROFITS AND INCOME, supra note 105, at 369 (indicating the most extreme forms of dividend stripping involved private companies mainly).
On the terminology, see ROSE, Economic, supra note 97, at 301.
On the 10% figure, see NAISH, supra note 104, at 25; GLEESON, People and Their Money: 50 Years of Private Investment, 136 (1981). Another estimate was 19%: WINCOTT, The Stock Exchange, 141 (1946).
“A Charter for Tax Reform”, Times, April 10, 1967, 17.
TREASURE, Toll, supra note 34.
TREASURE, id. See also TURNER, Business, supra note 33, at 435 (discussing how the chairman of British Petroleum received in 1939 £10,000 out of a salary of £25,000 and was paid £50,000 in 1968 and had a take-home pay of £9,700).
TITMUSS, supra note 101, at 123–24, 176–82.
MARLEY, “Entrepreneurial Aid for the Ailing Economy”, Times, March 21, 1969, 27.
GRIERSON, “The Case for Incentives Now”, Times, August 11, 1967, 19; “Why High Pay Pays Off at the Top”, Times, January 4, 1968, 21.
MERRETT, supra note 80, at 40.
ROGOW, Taxation, supra note 92, at 206.
Quoted in ROGOW, id. See also BEDDINGTON-BEHRENS, “Need for Incentives at the Top”, Times, February 2, 1967, 13.
Supra notes 5–6 and related discussion.
“New Issues — Less Important and Much Less Fun”, The Economist, March 16, 1968, 107.
FIJALKOWSI-BEREDAY, Equalizing, supra note 94, at 182; JEREMY, A Business History of Britain, 1900–1990s, 117 (1998).
JEREMY, Business, supra note 123, at 118 (providing a table on estate duty rates, 1894–1975); KAY/KING, supra note 35, at 161 (setting out rates of capital transfer tax, 1977–78).
KAY/ KING, supra note 35, at 161.
“The Charterhouse Investment Trust”, Times, January 9, 1951, 8. On the status of the Charterhouse Investment Trust as an issuing house, see CHARTERHOUSE FINANCE CORPORATION LIMITED, Corporate Financing in Great Britain, 17 Law and Contemporary Problems 239, 239 (1952). See also “Family Firms and Death Duties”, Times, July 16, 1951, 8.
TITMUSS, supra note 101, at 92, 96–97; WHITING, The Labour Party and Taxation: Party Identity and Political Purpose in Twentieth-Century Britain, 241 (2000). Even after 1975, trusts could operate as partial shields against estate tax: KAY/KING, supra note 35, at 55.
“Family Firms”, supra note 126.
Finance Act 1930, 20 & 21 Geo. 5, c. 28, s. 37; STANFORD, Tax Planning and the Family Company, 124 (2nd ed. 1964). The original statutory provision, enacted in 1922, extended the option to companies that had issued shares to public and otherwise were not under control of fewer than five persons: Finance Act 1922, 12 & 13 Geo. 5, c. 17, s. 21(6).
HADRILL, “Family Businesses” (Letter), Times, January 3, 1953, 7.
“Shell Kernels”, The Economist, March 15, 1958, 957. On the fact that an assets value measure did not take into account explicitly the size of the shareholding involved, see BAYNES, Share Valuations, 64–65, 115 (1966).
The terminology is borrowed from ROE, Political Preconditions to Separating Ownership from Corporate Control, 53 Stanford Law Review 539, 586 (2000).
Supra notes 11 to 13 and accompanying text.
Between 1919 and 1939 shares were a good bet since average year-to-year returns for equities were 12.4% compared with 6.5% for consols, a type of U.K. government bond. See MERRETT/SYKES, Return on Equities and Fixed Interest Securities: 1919–1966, District Bank Review, June 1966, 29, 36, 41; see also SCOTT, Towards the “Cult of the Equity”? Insurance Companies and the Interwar Capital Market, 55 Economic History Review 78, 93 (2002) (reporting that from 1921 to 1938 the average annual return on equities was 10.4% and the average annual return on gilts was 6.5%).
On the timing, see THOMAS, Finance, supra note 37, at 26–29, 32.
CUTFORTH, Public Companies and the Investor, 149 (1930); see also at 50.
BERLE/ MEANS, The Modern Corporation & Private Property, 110–11 (1997, originally published in 1932).
BERLE/ MEANS, supra note 138, at 60; MEANS, The Diffusion of Stock Ownership in the United States, 44 Quarterly Journal of Economics 561 (1930).
BERLE/ MEANS, supra note 138, at 58–59.
MEANS, Diffusion, supra note 139, at 586 (discussing the effective rate for a top marginal rate taxpayer); BANK, Dividend, supra note 35, at 17 (setting out individual and corporate tax rates for 1913–35).
MEANS, Diffusion, supra note 139, at 586.
MEANS, id., at 587.
MEANS, id., at 586.
MEANS, id., at 586; WARSHOW, The Distribution of Corporate Ownership in the United States, 39 Quarterly Journal of Economics 15, 37 (1924).
WARSHOW, Distribution, supra note 145, at 35; SOBEL, Inside Wall Street: Continuity and Change in the Financial District, 203 (1977); GEISST, Wall Street, A History, 157 (1997).
BERLE/ MEANS, supra note 138, at 5. For further details on the rise of the private investor, see section 6.2 of the paper.
LOWE, Riches, Poverty, and Progress, in: ROBBINS (ed.), The British Isles 1901–1951, 197, 200 (2002) (noting, however, that the data for 1911–13 is probably not as reliable as it was for later years).
THOMPSON, English, supra note 10, at 333.
GORDON, The Capital Market of Today, 102 Journal of the Royal Statistical Society 501, 509 (1939).
MICHIE, The City of London: Continuity and Change, 1850–1990, 121 (1992); see also THOMAS, Finance, supra note 37, at 117.
Quoted in MICHIE, City, supra note 151, at 120–21.
LOWE, Riches, supra note 148, at 200; THORPE, Britain, supra note 57, at 95.
LLOYD, Empire, Welfare State, Europe: History of the United Kingdom 1906–2001, 176 (5th ed. 2002).
Quoted in MICHIE, City, supra note 151, at 117.
ALDCROFT, British, supra note 55, at 150; LOWE, Riches, supra note 148, at 202.
DAUNTON, supra note 39, at 133.
On the standard rate of income tax between 1901 and 1930, see CAUDWELL, Practical, supra note 82, at 11.
GLYNN/ OXBORROW, Interwar Britain: A Social and Economic History, 48 (1976) (noting, though, that the government moderately reduced the standard rate of income tax for 1934 and 1935).
GLYNN/ OXBORROW, Interwar, id., at 48.
For more precise figures, see supra note 18 and related discussion.
SAMPSON, Anatomy of Britain, 398–401 (1962); RUTTERFORD, Introduction to Stock Exchange Investment, 339 (1983).
See COMMITTEE ON THE WORKING OF THE MONETARY SYSTEM (Lord Radcliffe, Chairman), Report, Cmnd. 827, 82 (1959); COMMITTEE TO REVIEW THE FUNCTIONING OF FINANCIAL INSTITUTIONS (Sir Harold Wilson, Chairman), Evidence on the Financing of Trade and Industry, vol. 3, 46–47 (1977), making the point by indicating that, as of 1957, life fund investments amounted to £4.042 billion whereas general fund investments were only £399 million and that, as of 1978, life fund investments were £37.8 billion and general fund investments were £7.1 billion.
PAISH/ SCHWARTZ, Insurance Funds and Their Investment, 92–93, 97 (1934).
SCOTT, supra note 135, at 98; COMMITTEE ON THE WORKING OF THE MONETARY SYSTEM, supra note 165, at 86.
On the data, see COMMITTEE ON THE WORKING OF THE MONETARY SYSTEM, supra note 165, at 86; MENNELL, Takeover: The Growth of Monopoly in Britain, 1951–61, 87–88 (1962); BRISTON, The Stock Exchange and Investment Analysis, 411 (3rd ed. 1975). On the change in investment policy see CLAYTON/OSBORN, Insurance Company Investment: Principles and Policy, 135–36 (1965).
CHARTERHOUSE FINANCE CORPORATION LIMITED, supra note 126, at 245.
COMMITTEE ON THE WORKING OF THE MONETARY SYSTEM, supra note 165, at 89; HANNAH, Inventing Retirement: The Development of Occupational Pensions in Britain, 74 (1986).
On permitted investments, see COMMITTEE ON THE WORKING OF THE MONETARY SYSTEM, supra note 165, at 89. On the switch to equities, see LITTLEWOOD, Stock, supra note 69, at 107–8; PLENDER, That’s the Way the Money Goes: The Financial Institutions and the Nation’s Savings, 40–41 (1982).
COMMITTEE ON THE WORKING OF THE MONETARY SYSTEM (Lord Radcliffe, Chairman), Minutes of Evidence, 501; BLEASE, Institutional Investors and the Stock Exchange, District Bank Review, September 1964, 38, 45.
On the position up to the mid-1950s, see COMMITTEE ON THE WORKING OF THE MONETARY SYSTEM, supra note 165, at 88. On the situation in the mid-1970s, see MIDGLEY/BURNS, Business Finance and the Capital Market, 363 (3rd ed. 1979).
BLAKE, Pension Schemes and Pension Funds in the United Kingdom, 38–39 (2nd ed. 2003); COMMITTEE ON THE TAXATION TREATMENT OF PROVISIONS FOR RETIREMENT (James M. Tucker, Chairman), Report, Cmd. 9063, 22 (1954).
On the effect of the 1993 reforms, see RILEY, “Second Thoughts on the Dividend Tax Dangers”, Fin. Times, June 18, 1997, 29. On the repeal of the refundable tax credits in 1997, see BANK, The Dividend Divide in Anglo-American Corporate Taxation, 30 Journal of Corporation Law 1, 47–48 (2004).
On ownership data, see sources cited supra note 18.
SEARJEANT, “Seven Years On, Brown’s Swoop on Pensions Looks Less Clever”, Times, October 15, 2004, 58; see also COHEN, “End Nostalgia for a Tax Break”, Financial Times, August 11, 2003, FT fm, 6 (acknowledging the popularity of the argument, but casting doubts on its validity).
FIFIELD, “Pension Funds Shun Equities for Bonds”, Financial Times, December 23, 2003, 4; COGGAN, “Pension Funds Steadily Forsaking U.K. Equities”, Financial Times, June 19/20, 2004, M28; KALETSKY, “Regulation Killed the Pensions Industry”, Times, October 16, 2006, 35.
WRIGHT, The Capital Market and the Finance of Industry, in: WORSWICK/ADY (eds.), The British Economy in the Nineteen-Fifties, 461, 482 (1962).
On the data, see PRAIS, The Evolution of Giant Firms in Britain: A Study of the Growth of Concentration in Manufacturing Industry in Britain 1909–70, 116 (1976); POLLARD, The Development of the British Economy, 332 (4th ed. 1992).
On 1952, 1962, 1967, 1972, see PRAIS, Evolution, supra note 181, at 116. On 1979, see COAKLEY/HARRIS, The City of Capital: London’s Role as a Financial Centre, 96 (1983).
BLUME, The Financial Markets, in: CAVES/KRAUSE (eds.), Britain’s Economic Performance, 261 (1980).
BRISTON/ DOBBINS, supra note 19, at 189.
BRISTON/ DOBBINS, id., at 18.
“Investment in Britain: A Survey”, The Economist, November 12, 1977, 49.
Supra notes 109–110 and related discussion.
“Missed Opportunity”, The Economist, April 10, 1965, 210, 210.
Finance Act 1962, 10 & 11 Eliz. 2, c. 44, ss. 12–16, sch. 9; Finance Act 1965, s. 17; for background, see BEATTIE, Elements of the Law of Income and Capital Gains Taxation, 6, 106–9 (9th ed. 1970).
GLEESON, supra note 110, at 136.
“Corpse in the Capital Market”, The Economist, February 7, 1953, 375, 375.
BLUME, Financial, supra note 183, at 276–77, 294 (only citing precise amounts for 1966 to 1977).
CHARTERHOUSE FINANCE CORPORATION LIMITED, supra note 126, at 245.
DIMSON/ MARSH/ STAUNTON, Triumph of the Optimists: 101 Years of Global Investment Returns, 153, 303 (2002); PRATTEN, The Stock Market, University of Cambridge Department of Applied Economics Occasional Paper No. 59, 75 (1993) (offering data on investment returns for shares, government bonds and debentures for the 1950s, 1960s and 1970s).
For an overview, see BLAKE, Pension, supra note 174, at 38–41.
LITTLEWOOD, Stock, supra note 69, at 255; HANNAH, Inventing, supra note 170, at 66–67.
GILLING-SMITH, Pensions, in: STANLEY (ed.), The Creation and Protection of Capital, 109, 110 (1974).
On employer contributions, see BEATTIE, Elements, supra note 189, at 129–30; COMMITTEE ON THE TAXATION TREATMENT OF PROVISIONS FOR RETIREMENT (James M. Tucker, Chairman), Report, Cmd. 9063, 21 (1954). On employee contributions, see BLAKE, Pension, supra note 174, at 38–40; HOSKING, Pension Schemes and Retirement Benefits, 63–65 (1956).
PILCH/ WOOD, Pension Schemes: A Guide to Principles and Practice, 113 (1979).
TITMUSS, supra note 101, at 148–50; “Advantages of a ‘Top Hat’ Pension Scheme”, Times, December 4, 1967, 26.
On the changes made in the mid-1950s, see HANNAH, Inventing, supra note 170, at 49–50. On the 1971 reforms, see GILLING-SMITH, Pensions, in: STANLEY (ed.), supra note 197, at 109, 109–10.
On the tax advantages life insurance traditionally offered, see KAY/KING, supra note 35, at 62–63, 210; SIMPSON, Life Policies and Annuities, in: STANLEY (ed.), supra note 197, at
On the partial erosion of the tax-favored status of insurance from the 1970s onwards, see SOLE, The Puzzle of Life Office Tax, 1 British Actuaries Journal 79, 97 (1995); ARMITAGE, Returns After Personal Tax on U.K. Equity and Gilts, 1919–1998, 10 European Journal of Finance 23, 29, 32 (2004).
KAY/ KING, supra note 35, at 64; SIMPSON, supra note 202, at 133.
GLEESON, People, supra note 110, at 74.
MIDGLEY/ BURNS, Business, supra note 173, at 436–37; BLUME, Financial, supra note 183, at 287–88; BROWN/TRIMM, Life Assurance: Its Tax Implications and Practical Uses, 5 (1977).
COMMITTEE TO REVIEW THE FUNCTIONING OF FINANCIAL INSTITUTIONS, supra note 165, at 66; CLARKE, Inside the City: A Guide to London as a Financial Centre, 102 (1983).
FLORENCE, supra note 14, at 179.
COLE, Evolution, supra note 11, at 58; FLORENCE, supra note 14, at 181–82.
PARKINSON, Scientific, supra note 12, at 13.
COLE, Evolution, supra note 11, at 59.
KYNASTON, The City of London, Volume IV: A Club No More 1945–2000, 434 (2001).
SAMPSON, Anatomy, supra note 164, at 412; PLENDER, supra note 171, at 20.
DENNETT, A Sense of Security: 150 Years of Prudential, 298–301 (1998); HOBSON, The National Wealth: Who Gets What in Britain, 1005 (1999).
SPIEGELBERG, The City: Power Without Accountability, 57 (1973); COMMITTEE TO REVIEW THE FUNCTIONING OF FINANCIAL INSTITUTIONS, supra note 165, at 90, 122.
COMMITTEE TO REVIEW THE FUNCTIONING OF FINANCIAL INSTITUTIONS (Sir Harold Wilson, Chairman), Report, Cmnd. 7937, 311 (1980).
Finance Act 1965, c. 25, ss. 37–38, 67–68; for background, see WHEATCROFT, Capital Gains Tax, 127 (1965). The position was complicated further by a tax on “short-term” profits in place between 1962 and 1971, discussed supra note 189 and related text.
REVELL, The British Financial System, 447 (1973).
Finance Act 1965, s. 37. Other requirements were that the investment trust or unit trust had to derive its income mainly from shares and securities, had to be quoted on a recognized stock exchange, could not distribute dividends from profits arising from the realization of investments, and could not retain more than 15% of its income from shares in any accounting period.
On the interwar period, see COMPTON/BOTT, British Industry: Its Changing Structure in Peace and War, 195 (1940); WILLIAMS, Insurance Companies and Investment Trusts, in: COLE, Studies, supra note 11, at 139, 154. On the formation of investment trusts in the late 1950s and early 1960s, see NEWLANDS, Put Not Your Trust in Money, 256 (1997).
BRISTON/ DOBBINS, supra note 19, at 17; LITTLEWOOD, Stock, supra note 69, at 262.
On the impact of capital controls, see MACRAE, The London Capital Market: Its Structure, Strains and Management, 85–86 (1955). On the difficulties investment trusts had on the marketing front, see BRISTON/DOBBINS, supra note 19, at 17; LITTLEWOOD, Stock, supra note 69, at 262. On the effect of exchange controls and capital gains tax, see NEWLANDS, Put, supra note 219, at 268–70, 279–80, 297–302.
LITTLEWOOD, Stock, supra note 69, at 260; SAMPSON, The New Anatomy of Britain, 479–80 (1971).
HADDEN, Company Law and Capitalism, 385 (1972); GOWER, The Principles of Modern Company Law, 266 (4th ed. 1979).
Investment companies were liable to pay income tax and any applicable profits taxes, but could deduct taxes on profits and dividends already paid by companies in which they invested: GIFFORD/STEVENS, Making Money on the Stock Exchange: A Beginners’ Guide to Investment Policy, 162 (1955). Cash distributions made by unit trusts and investment trusts generally were taxable in the hands of investors in the same way as a dividend received from a normal U.K. company: MERRIMAN, Mutual Funds and Unit Trusts: A Global View, 54 (1965); ADAMS, Investment, 24, 187, 199 (1989). Once capital gains tax was introduced in 1965, it applied to dispositions of holdings in investment trusts and unit trusts in the same manner it applied to a sale of equity in a public company, though during the 1970s credits potentially available could make the effective rate lower. See BEATTIE, Elements of the Law of Income and Capital Gains Taxation, 271–72 (8th ed. 1968); CARMICHAEL, Capital Gains Tax, 356–57 (2nd ed. 1974); CRETTON, Practical C.G.T., 107–8 (1982).
For sources, see supra note 18.
Investment trusts, in the available data, are encompassed within “other financial institutions”. MOYLE, supra note 18, provided a separate breakdown within this category for investment trusts and other owners, with the figures being 5.2% (investment trusts) and 1.6% (other) for 1957 and 7.4% (investment trusts) and 2.6% (other) in 1963.
WHEATCROFT, Capital, supra note 216, at 202.
BURTON/ CORNER, Investment and Unit Trusts in Britain and America, 291 (1968).
BURTON/ CORNER, id., at 4; GLASGOW, The English Investment Trust Companies, 110–88 (1930) (of 76 investment trusts listed, 10 restricted investments in any one security to 10% of total issued funds, 15 imposed a limit of 5% and 12 had a lower percentage limit. The remaining 39 had no restrictions).
BURTON/ CORNER, id., at 150.
ROY, Socializing Capital: The Rise of the Large Industrial Corporation in America, 3, 16–18 (1997); O’SULLIVAN, Contests for Corporate Control: Corporate Governance and Economic Performance in the United States and Germany, 75–77 (2000).
BASKIN/ MIRANTI, A History of Corporate Finance, 193 (1997).
CHANDLER, The United States: Seedbed of Managerial Capitalism, in: CHANDLER/DAEMS (eds.), Managerial Hierarchies: Comparative Perspectives on the Rise of the Modern Industrial Enterprise, 9, 30–31 (1980).
BERLE/ MEANS, supra note 138, at 5.
BECHT/ DELONG, supra note 31, at 651.
BURCH, The Managerial Revolution Reassessed: Family Control in America’s Large Corporations, 3–4 (1972), discussing TEMPORARY NATIONAL ECONOMIC COMMITTEE, The Distribution of Ownership in the 200 Largest Nonfinancial Corporations, Monograph, No. 29 (1940); LEECH, Ownership Concentration and Control in Large U.S. Corporations in the 1930s: An Analysis of the TNEC Sample, 35 Journal of Industrial Economics 333 (1987).
MEANS, Diffusion, supra note 139, at 591–92. For shareholders in companies with large accumulated profits, there was some expectation that the effect of the higher rates would be mitigated by a provision in the 1917 Revenue Act that tied the rate of dividend tax to the rate of tax in effect in the year when the profits were earned. See ADAMS, Principles of Excess Profits Taxation, 75 Annals of the American Academy of Political and Social Science 147, 149 (1918); SELIGMAN, The War Revenue Act, 33 Political Science Quarterly 1, 23 (1918).
ZOLLER, A Criticism of the War Revenue Act of 1917, 75 Annals of the American Academy of Political and Social Science 182, 186–87 (1918) (Zoller was a tax attorney for General Electric corporation); TAUSSIG, The War Tax Act of 1917, 32 Quarterly Journal of Economics 1, 20 (1917) (calling the differentiation “indefensible as a matter of principle.”). The prejudice to taxpayers was contained to some degree because corporations were retaining an increasing amount of earnings, all of which avoided the surtax until distribution. BANK, A Capital Lock-In Theory of the Corporate Income Tax, 94 Georgetown Law Journal 889, 918 (2006).
HICKS et al., supra note 41, at 123–24. On the fact that this tax was based on the British tax, see “Committee Plans Alternative Tax on War Profits”, New York Times, July 30, 1918, 1.
For an example illustrating the point, see BLAKEY/BLAKEY, The Revenue Act of 1918, 9 American Economic Review 213, 226–27 (1919).
On the components as of 1919, see BLAKEY/BLAKEY, id., at 228.
BLAKEY/ BLAKEY, id., at 226 (indicating the tax rate on profits below 20% of invested capital was 30%, subject to an excess profits tax credit of $3,000).
“Otto Kahn Attacks War Tax System”, New York Times, September 2, 1919.
“Otto Kahn”, id.
“Otto Kahn”, id.; MEANS, Diffusion, supra note 139, at 587-89.
MEANS, Diffusion, supra note 139, at 589–90.
GEISST, Wall Street, A History, 178 (1997) (describing an eight-fold increase in I.P.O. activity between 1926 and 1928); MYERS, A Financial History of the United States, 297 (1970) (indicating the amount of common stock issued increased from $200 million in 1921 to $2.094 billion in 1928 before peaking at $5.062 billion in 1929).
HENDRICKS, Developments in the Taxation of Reorganizations, 34 Columbia Law Review 1198, 1222 (1934).
Revenue Act of 1918, ch. 18, § 202(b), 40 Stat. 1058 (1919).
SANDBERG, The Income Tax Subsidy to “Reorganizations”, 38 Columbia L. Rev. 98, 102 (1938); BANK, Mergers, Taxes, and Historical Realism, 75 Tulane Law Review 1, 9, 11 (2000).
Hearings on H.R. 8245 Before the Senate Comm. on Finance, 67th Cong. 29 (1921) (statement of Dr. T.S. Adams, advisor to the Treasury Department).
MARKHAM, Survey of the Evidence and Findings on Mergers, in: Business Concentration and Price Policy, 141, 168–69 (1955).
On the position the federal government took, see “Income Taxpayers to Suffer Penalty”, New York Times, Mar. 17, 1921, 17. On the doubts that existed about the tax status of capital gains under federal income tax legislation, see “To Ignore Tax Decision”, New York Times, Feb. 12, 1921, 17. The cases which cast doubt on whether capital gains were taxable under income tax were Gray v. Darlington, 82 U.S. (15 Wall.) 63 (1872) (ruling on the tax status of capital gains under a Civil War income tax statute); Hays v. Gauley Mountain Coal Co., 247 U.S. 189, 192–94 (1918); Doyle v. Mitchell Bros., 247 U.S. 179, 183, 185 (1918) (both ruling on the Corporate Excise Tax Act of 1909, ch. 6, § 38, 36 Stat. 11, 112); Brewster v. Walsh, 268 F. 207 (D. Conn. 1920) (ruling on the federal income tax statute introduced in 1913).
PAUL, Taxation in the United States, 129 (1954).
BASKIN/ MIRANTI, supra note 232, at 190. Other estimates vary substantially, but the trend is the same. Means estimated in his 1930 article that the number of stockholders rose from 4.4 million in 1900 to 8.6 million in 1917 to 14.4 million in 1923: MEANS, supra note 139, at 595. On the other hand, SOBEL, supra note 146, estimates there were 100,000 shareholders prior to 1900 and three million shareholders by 1929.
ROE, Strong, supra note 21, at 6–7.
Roe implicitly treated this question as being the most important in the U.S. context, saying “I shifted the emphasis to what seems the deeper cause: the historical inability of major financial institutions to own big blocks of stock and to become active in the boardroom”: id., at xii. Some of the gaps in Roe’s analysis are filled by BECHT/DELONG, supra note 31.
ROE, Strong, supra note 21, at 55, 60–61, 80–88, 95–96.
ROE, id., at 106–7, 122–23.
ROE, id., at 102.
ROE, id., at 107.
BERLE/ MEANS, supra note 138, at 109.
KLEIN, Rainbow’s End: The Crash of 1929, 152 (2001).
BERLE/ MEANS, supra note 138, at 69–71; COCHRAN, American Business in the Twentieth Century, 42–43 (1972).
“Tax Bill Changes Offered by Borah”, New York Times, March 2, 1934, 38.
From 1932 to 1934, companies paid high rates of corporate tax for the privilege of filing a consolidated return and in 1934 this option was denied to all companies except railway corporations. See BANK, Tax, Corporate Governance, and Norms, 61 Washington & Lee Law Review 1159, 1164 n. 13 (2004). The rules precluding the use of consolidated returns was reversed partially in 1940 and then completely in 1942: MUNDSTOCK, Taxation of Intercorporate Dividends Under an Unintegrated Regime, 44 Tax Law Review 1, 10 (1988). The 1942 change, though, effectively introduced a 100% exclusion for inter-corporate dividends in companies filing a consolidated return. Id., at 11.
MAGILL, Effect of Taxation on Corporate Policies, 1938 United States Law Review 637, 642.
MORCK, How to Eliminate Pyramidal Business Groups: The Double Taxation of Inter-corporate Dividends and Other Incisive Uses of Tax Policy, working paper (published in 2005 NBER Tax Annual), 8–9 (2004).
The legislation lowered what was called the dividends received deduction from a 100% exclusion to a 90% exclusion. See Revenue Act of 1935, Pub. L. No. 74-407, § 102(h), 49 Stat. 1016 (reducing the dividends received deduction from 100% to 90%). In 1936, the exclusion was further reduced to 85%. See Revenue Act of 1936, Pub. L. No. 74-740, § 26(b), 49 Stat. 1648, 1664.
MORCK, How, supra note 271, at 9, 11–12.
ROE, Strong, supra note 21, at 107–8.
MORCK, How, supra note 271; MORCK/YEUNG, Dividend Taxation and Corporate Governance, 19 Journal of Economic Perspectives 163 (2005).
MORCK, How, supra note 271, at 9–13, 27, 35.
See SCHAFFER, The Income Tax on Intercorporate Dividends, 33 Tax Lawyer 161, 164 (1979) (noting that with a 90% exclusion for inter-corporate dividends, the tax cost to dividends was likely offset by the savings from not having income subject to the higher marginal corporate income tax rates).
MORCK, How, supra note 271, at 28.
MORCK, id., at 27.
MORCK, id., at 13, 35.
MAGILL, supra note 270, at 642.
MORCK/ PERCY/ TIAN/ YEUNG, The Rise and Fall of the Widely Held Firm: A History of Corporate Ownership in Canada, in: MORCK, History, supra note 5, at 65, 113–15.
PFEIFER, “Anglo-Saxon Attitudes are Forced on Deutschland AG”, Telegraph, May 15, 2005; DAUER, “Corporate Germany Ups Pace on Disposal of Cross Holdings”, Business, July 3, 2005, 10; DOUGHERTY, “Less ‘Germany Inc.’ More Openness”, International Herald Tribune, September 3, 2005, 9.
FOHLIN, The History of Corporate Ownership and Control in Germany, in: MORCK, History, supra note 5, at 223, 233 (Table 4.2, providing percentages of shares owned by non-financial companies 1990–98), 245.
MORCK, How, supra note 271, at 5–7; MORCK/YEUNG, supra note 275, at 176.
AGANIN/ VOLPIN, The History of Corporate Ownership in Italy, in: MORCK, History, supra note 5, at 325, 348–50.
FRANKS/ MAYER/ ROSSI, Spending, supra note 5, at 582.
MORCK, How, supra note 271, at 7.
MORCK, id., at 7.
On the U.S., see HOLDERNESS/SHEEHAN, The Role of Majority Shareholders in Publicly Held Corporations: An Exploratory Analysis, 20 Journal of Financial Economics 317 (1988) (reporting that as of 1984, 663 of 5240 companies traded on national stock markets had a majority owner); ANDERSON/DURU/REEB, Corporate Opacity and Family Ownership in the U.S., unpublished working paper (2006) (finding that of the largest 2000 U.S. firms as of 2001–03, 48% had continued family involvement, with family ownership averaging 20%). On the U.K., see FACCIO/LANG, The Ultimate Ownership of Western European Corporations, 65 Journal of Financial Economics 365 (2002) (reporting that of 1,953 U.K. public companies 63% were widely held in the sense they lacked a 20% shareholder, 24% had a family owner, 9% had a public company blockholder and 4% had a blockholder of a different sort).
MORCK, How, supra note 271, at 5.
FACCIO/ LANG, supra note 290, at 389.
DESAI/ DHARMAPALA/ FUNG, Taxation and the Evolution of Aggregate Corporate Ownership Concentration, NBER Working Paper Series No. 11469 (2005).
On the U.K., for example, the only systematic study from prior to the 1970s offered only data for 1936 and 1951: FLORENCE, Ownership, supra note 14. FRANKS/MAYER/ROSSI, supra note 9, offers data on trends throughout the 20th century, but the sample size is far too small (40 companies incorporated around 1900, 20 of whom survived to 2000, and 20 incorporated around 1960 that survived to 2000) to offer any sort of representative picture of ownership patterns in U.K. companies. In the U.S., there were only three pre-1970 studies of the ownership structure of large companies, in each instance focusing on the ownership patterns in the 200 largest non-financial companies. These were BERLE/MEANS, supra note 138; TEMPORARY NATIONAL ECONOMIC COMMITTEE, supra note 236 (offering data for 1937) and LARNER, Ownership and Control in the 200 Largest Nonfinancial Corporations, 1929 and 1963, 56 American Economic Review 777 (1966) (offering data for 1963).
MORCK/ PERCY/ TIAN/ YEUNG, supra note 282, at 100 (providing a graph). A key potential difficulty is that they were only able to compile data for every ten years until 1960, and every five years thereafter — id., at 98.
See BANK, Capital Lock-In Theory, supra note 240, at 914.
CHEFFINS, Current Trends in Corporate Governance: Going from London to Milan via Toronto, 10 Duke Journal of Comparative and International Law 5, 13–26 (1999) (U.K.); DENT, Corporate Governance: Still Broke, No Fix in Sight, 31 Journal of Corporation Law 39, 40–45 (2005) (U.S.).
SEARJEANT, “Plc is Ready to Join Mutuals in Land of the Dodo”, Times, April 21, 2006, 71; JENKINS, “The Market to End All Markets”, Wall Street Journal, December 6, 2006, A17.
HARDING, “Unions Expose Inequity in U.K. Corporate Taxation”, Times, February 8, 2007 (discussing the tax subsidy to private equity from the interest deduction); FLEISCHER, Two and Twenty: Taxing Partnership Profits in Private Equity Funds, University of Colorado Law Legal Studies Paper No. 06-27, 20 (2006). Cf. RIBSTEIN, The Important Role of Non-Organization Law, 40 Wake Forest Law Review 751, 767 (2006) (arguing that partly for tax reasons managers of public companies want the businesses to continue to operate as incorporated entities rather than converting to partnerships).
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Bank, S., Cheffins, B.R. (2008). Tax and the Separation of Ownership and Control. In: Schön, W. (eds) Tax and Corporate Governance. MPI Studies on Intellectual Property, Competition and Tax Law, vol 3. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-540-77276-7_9
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