Abstract
Should corporations pay tax?
The author would like to thank David Hasen, Bob Kuttner, Sagit Leviner, Wolfgang Schön, Dganit Sivan, Pekka Timmonen, and participants in workshops at Georgetown Law Center, the Interdisciplinary Center, Herzelya, and the Max Planck Institute for Intellectual Property, Competition and Tax Law.
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References
FRIEDMAN, The Social Responsibility of Business Is To Increase Its Profits, NY Times SM17 (Sept. 13, 1970).
For my view on this debate, as well as a review of the extensive literature, see AVI-YONAH, Corporations, Society and the State: A Defense of the Corporate Tax, 90 Va. L. Rev. 1193 (2004).
For a review of this debate see AVI-YONAH, The Cyclical Transformations of the Corporate Form: A Historical Perspective on Corporate Social Responsibility, 30 Del. J. Corp. L. 767 (2005), and for previous literature see, e.g., JENSEN, Value Maximization, Stakeholder Theory, and the Corporate Objective Function, 12 Bus. Ethics Q. 235 (2002); see also JENSEN/MECKLING, The Theory of the Firm: Managerial Behavior, Agency Costs, and Ownership Structure, 3 J. Fin. Econ. 305 (1976). For different perspectives on CSR in general see also PHILIPS, Reappraising the Real Entity Theory of the Corporation, 21 Fla. St. U. L. Rev. 1061 (1994) WELLS, The Cycles of Corporate Social Responsibility: An Historical Retrospective for the Twenty-first Century, 51 Kansas L. Rev. 77 (2002); ALLEN, Our Schizophrenic Conception of the Business Corporation, 14 Cardozo L. Rev. 261 (1992); WILLIAMS, Corporate Social Responsibility in an Era of Economic Globalization, 35 UC Davis L. Rev. 705 (2002); CHEN/HANSON, The Illusion of Law: The Legitimating Schemas of Modern Policy and Corporate Law, 103 Mich. L. Rev. 1 (2004).
See AVI-YONAH, Cyclical Transformations, supra note 3.
See AVI-YONAH, id., and the literature cited therein.
See, e.g., ARROW, Social Responsibility and Economic Efficiency, 21 Pub. Policy 303, 303–07 (1973); HAYEK, The Corporation in a Democratic Society, in Whose Interest Ought It and Will It Be Run, in: ANSHEN/BACH (eds.), Management and Corporations, 99 (1960); FRIEDMAN, supra note 1. The classic case affirming this “shareholder primacy” doctrine is Ford Motor Co., 204 Mich. 459, 507, 170 N.W. 688 (1919). See also the classic debate between Berle and Dodd (BERLE, Corporate Powers as Powers in Trust, 44 Harv. L. Rev. 1049 (1931); DODD, For Whom Are Corporate Managers Trustees, 45 Harv. Law Rev. 1145 (1932); BERLE, For Whom Are Corporate Managers Trustees: A Note, 45 Harv. Law Rev. 1365 (1932)). The shareholder primacy doctrine has become a mainstay of modern corporate law. See, e.g., HANSMANN/KRAAKMAN, The End of History for Corporate Law, 89 Geo. L.J. 439, 441, 449–451 (2001) (shareholder primacy likely to dominate future development of corporate law); EASTERBROOK/FISCHEL, the Economic Structure of Corporate Law 12 (1991) (stating that shareholders, as residual claimants, have implicitly contracted for promise that firm will maximize profits in long run); MANNE/WALLICH, The Modern Corporation and Social Responsibility (1972) (noting that social responsibility of corporations is shareholder wealth maximizing); BLACK/KRAAKMAN, A Self-Enforcing Model of Corporate Law, 109 Harv. L. Rev. 1911 (1996) (arguing that principal goal of corporate law is to maximize shareholder wealth); see also BRADLEY/SCHIPANI/SUNDARAM/WALSH, The Purposes and Accountability of the Corporation in Contemporary Society: Corporate Governance at a Crossroads, 62 Law & Contemp. Probs. 9 (1999); ROMANO, The Political Economy of Takeover Statutes, 73 Va. L. Rev. 111, 113 (1987) (asserting that core goal of corporate law is to maximize equity share prices); GREENWOOD, Fictional Shareholders: For Whom Are Corporate Managers Trustees, Revisited, 69 S. Cal. L. Rev. 1021, 1023 (1996) (“[A]ll but the communitarians agree that virtually the sole task of corporate law is to ensure that managers act as agents for the shareholder owners.”); cf. COFFEE, Unstable Coalitions: Corporate Governance As a Multi-Player Game, 78 Geo. L.J. 1495 (1990) (discussing role of stakeholders in firm); BEBCHUK/FRIED, Pay Without Performance (2004) (discussing need to align managerial incentives with shareholder interests). For arguments on the other side see WILLIAMS, Corporate Social Responsibility in an Era of Economic Globalization, supra note 3 (it is debatable whether HANSMANN/KRAAKMAN’s statement about shareholders’ control of the corporation is accurate in the United States. In fact, one of the striking features of American corporate law is how little real control shareholders have, given that they are the “owners” of the corporation); BLAIR/STOUT, A Team Production Theory of Corporate Law, 85 Va. L. Rev. 247, 310 (1999) (where shareholders are widely dispersed, shareholders’ voting rights are practically meaningless, given collective action problems, shareholders’ rational apathy, and the power top managers exercise in nominating the candidates for the board and in otherwise shaping the voting agenda); MITCHELL, A Theoretical and Practical Framework for Enforcing Corporate Constituency Statutes, 70 Tex. L. Rev. 579, 630–43 (1992) (arguing that courts should modify corporate law to grant stakeholders standing to sue directors when the former are harmed by corporate action); O’CONNOR, The Human Capital Era: Reconceptualizing Corporate Law to Facilitate Labor-Management Cooperation, 78 Cornell L. Rev. 899, 936–65 (1993) (arguing that corporate law should be changed to encourage employee representation on the board and standing to sue); MILLON, Theories of the Corporation, 1990 Duke L.J. 201, 261–62 (praising case law that reaffirms directors’ discretion to consider nonshareholder interests). See generally MITCHELL (ed.), Progressive Corporate Law (1995) (surveying recent nontraditional approaches to corporate legal scholarship); Developments in the Law-Corporations and Society, 117 Harv. L. Rev. 2176–2177 (2004).
MCCRUDDEN, Corporate Social Responsibility and European public Procurement, in: MCBARNET/VOICULESCU/CAMPBELL (eds.), The New Corporate Accountability: Corporate Social Responsibility and the Law (forthcoming, 2007).
This part is based on AVI-YONAH, Cyclical Transformations, supra note 3.
These three theories are the standard ones in the literature. See, e.g., MILLON, supra note 6. For a full exposition of these developments see AVI-YONAH, Cyclical Transformations, supra note 3.
WHITE, From Expectation to Experience: Essays on Law & Legal Education (1999).
HALL/ SOSKICE (eds.), Varieties of Capitalism: The Institutional Foundations of Comparative Advantage (2001).
FIORETOS, Varieties of Capitalism, Institutional Change, and Multilateralism in Post-War Europe, 11–12 (2004).
EUROPEAN COMMISSION, Corporate Social Responsibility: National Public Policy in the European Union (2004).
ROE, A Political Theory of American Corporate Finance, 91 Colum. L. Rev. 10 (1991); BEBCHUK/ROE, A Theory of Path Dependence in Corporate Ownership and Governance, 52 Stan. L. Rev. 127 (1999); WEST, The Puzzling Divergence of Corporate Law: Evidence and Explanations from Japan and the United States, 150 U. Pa. L. Rev. 527 (2001).
AVI-YONAH, Cyclical Transformations, supra note 3.
See WALSH/AVI-YONAH, The Unfettered Corporation: Corporate Social Responsibility and the Coming Crisis of Corporate Control (forthcoming).
Corporate tax rates were higher before 1986, but the base was narrower, so that the 1986 tax reform act (which reduced the rate from 46% to the current 35%) actually raised taxes on corporations. However, the effective tax rates today are close to what they were before 1986. See YIN, Getting Serious about Corporate Tax Shelters, 54 SMU L. Rev. 209 (2001).
See, e.g., BANKMAN, The New Market in Corporate Tax Shelters, 83 Tax Notes 1775 (1999); WEISBACH, The Failure of Disclosure as an Approach to Shelters, 54 SMU L. Rev. 73 (2001); YIN, id.
The litigation record is mixed, see ACM Partnership v. Comm’r, 157 F.3d 231 (3rd Cir. 1998); Compaq v. Comm’r, 277 F.3d 778 (5th Cir. 2001); UPS v. Comm’r, 254 F.3d 1014 (11th Cir. 2001).
In developing countries the corporate tax can amount to as much as 25% of total tax revenues, see SHOME (ed.), World Bank, Tax Policy Handbook, 165 (1995). The average from 1990 to 2001 was 17%, as opposed to 7% in developed countries: KEEN/SIMONE, Is Tax Competition Harming Developing Countries More Than Developed? 34 Tax Notes Int’l 1317 (2004). Keen and Simone show that from 1990 to 2001 corporate tax rates have declined in both developed and developing countries. However, while in developed countries this decline in the rates was matched by a broadening of the tax base, so that no decline in revenues can be observed, in developing countries the same period witnessed a decline of corporate tax revenues by about 20 percent on average.
AVI-YONAH, Globalization, Tax Competition, and the Fiscal Crisis of the Welfare State, 113 Harv. L. Rev. 1573 (2000); ROIN, Competition and Evasion: Another Perspective on International Tax Competition, 89 Geo. L.J. 543 (2001).
AVI-YONAH, For Haven’s Sake: Reflections on Inversion Transactions, 95 Tax Notes 1793 (2002).
As one sociologist has stated, “[t]he recurrent problem in sociology is to conceive of corporate organization, and to study it, in ways that do not anthropomorphize it and do not reduce it to the behavior of individuals or of human aggregates.” SWANSON, The Tasks of Sociology, 192 Science 665 (1976). A whole branch of economic sociology centers on the study of organizations, and there are numerous books devoted to the topic. See, e.g., THOMPSON, Organizations in Action: Social Science Bases of Administrative Theory (1967, reissued 2003); SCOTT, Organizations: Rational, Natural, and Open Systems (5th ed. 2003); PFEFFER/SALANCIK, The External Control of Organizations: A Resource Dependence Perspective (1978, reissued 2003); POWELL/DIMAGGIO (eds.), The New Institutionalism in Organizational Analysis (1991); SMELSER/SWEDBERG (eds.), The Handbook of Economic Sociology (1994), especially Part II, Section C, The Sociology of Firms, Organizations, and Industry. Most of these books revolve around the study of large corporations, since these are the dominant forms of organization in this society.
Hand’s statement was dicta in the context of the most famous case shutting down an avenue of tax avoidance, Gregory v. Helvering. As Assaf Likhovski has shown, this statement (and the whole opinion) should be understood against the background of the contemporary hearings into tax evasion by rich and famous Americans such as Andrew Mellon. It seems to me that if pressed even Hand would acknowledge that the tax system could not work if everybody tried as hard as Mellon did to avoid paying their taxes. LIKHOVSKI, The Story of Gregory: How Are Tax Avoidance Cases Decided, in: BANK/STARK (eds.), Business Tax Stories 89 (2005).
BRAITHWAITE, Restorative Justice and Responsive Regulation (2003).
ACM,supra note 19; Coltec v. U.S., 454 F.3d 1340 (Fed. Cir. 2006).
DESAI, Earnings Management and Corporate Tax Shelters (2006).
KEEN/ SIMONE, supra note 20.
AVI-YONAH, Corporations, Society and the State: A Defense of the Corporate Tax, supra note 2.
WEISBACH/ NUSSIM, The Integration of Tax and Spending Programs, 113 Yale L.J. 955 (2004).
This still leaves unanswered the question of how to hold corporations accountable for CSR behavior. See WALSH/AVI-YONAH, supra note 16.
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Avi-Yonah, R.S. (2008). Corporate Social Responsibility and Strategic Tax Behavior. 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_13
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