The Regulation of Corporate Groups: Can Tax Help with Regulation?

Abstract:     
This paper proposes that the corporation income tax (“CIT”) contributes, and may contribute more effectively, to the regulation of corporate groups. The paper is divided in two parts. In the first part, the paper will argue that a CIT system contributes to the regulation of corporate groups by minimizing the firm’s agency problems, and by limiting and controlling managerial power. In the second part, the paper will discuss how a CIT system may be improved so that it may contribute more effectively to their regulation. The paper will argue that in a second best world, i.e., CIT’s world, pure efficiency and regulatory considerations should guide tax intervention. The policy principle proposed is that, absent agency problems and other market failures, transaction costs and other sources of deadweight loss should be reduced as much as possible. Thus, the reduction or elimination of specific transaction costs and other sources of deadweight loss should be pursued only when such reduction or elimination does not adversely influence the CIT’s regulatory functions. Otherwise, the specific aspects of the CIT system under consideration may often be better maintained. By following this policy approach, the CIT should be actively contributing for a better regulatory environment in the corporate sector.

Number of Pages in PDF File: 30

Keywords: Corporate Taxation, Corporate Groups, Optimality, Corporate Governance and Taxation, Corporate Tax Policy

working papers series