Does the Structure of the Franchise Tax Matter?

Abstract

Conventional wisdom, supported by theory and evidence, has it that the franchise tax plays an important role in shaping Delaware corporate law.The literature, however, fails to address Delaware tax structure, and how such structure affects Delaware’s incentives. Delaware’s Compensation first submitted the view that if the tax matters, then the tax’s structure matters too. My second goal in Delaware’s Compensation was to draw attention to the state’s current tax structure and to argue that this structure is suboptimal. The third goal in Delaware’s Compensation was to offer potential reasons why Delaware’s tax is not better designed to reward Delaware for performance. In his thoughtful and detailed commentary, Professor Henderson offers two challenges to the view that the structure of the tax matters and that a change to the structure could create value. First, he argues, I do not offer a coherent theory as to why tax structure should affect legislative incentives. More particularly, he argues that the tax structure may not be relevant since Delaware’s legislative utility does not simply or wholly correspond with increasing tax revenues. Second, he argues, I do not take into account managers’ incentives to lobby Delaware’s legislature. This piece responds to Henderson's challenges

Keywords: Delaware, Franchise Tax, Corporate Law

JEL Classification: G3 , G30, G34, K22