A Capital Lock-In Theory of the Corporate Income Tax

54 Pages Posted: 30 Nov 2005

See all articles by Steven A. Bank

Steven A. Bank

University of California, Los Angeles (UCLA) - School of Law


The separate taxation of corporations has attracted significant attention recently, but it has yet to be adequately explained. In part, this may be because the understanding of the corporation itself has been insufficiently developed. Recently, however, scholars have begun to study a new feature of the corporation - its ability to lock-in capital and the earnings from capital - that has been overlooked and may offer hope in understanding the corporate tax. Capital lock-in may be economically beneficial for firms with long-range investments and firm-specific assets, but it poses difficulty for a progressive individual income tax system. Unless shareholders are taxed currently on undistributed corporate earnings, there is a risk of deferral because dividends are at the discretion of the board of directors. Imposing pass-through taxation, however, could threaten capital lock-in and incur the wrath of corporate managers. At an early point, this tension was resolved by imposing a corporate tax that levied a current charge on earnings, but under its own rate structure to minimize any distributive pressure from the historically high marginal rates applicable to individuals. While much has changed in the income tax system in the last century, this compromise continues to describe our system. Whether it is a compromise that has value is something that merits further study as part of the current consideration of fundamental tax reform.

Keywords: Corporate taxation, corporate earnings

JEL Classification: H25

Suggested Citation

Bank, Steven A., A Capital Lock-In Theory of the Corporate Income Tax. Georgetown Law Journal, Vol. 94, 2006, UCLA School of Law, Law-Econ Research Paper No. 05-28, Available at SSRN: https://ssrn.com/abstract=861244

Steven A. Bank (Contact Author)

University of California, Los Angeles (UCLA) - School of Law ( email )

385 Charles E. Young Dr. East
Room 1242
Los Angeles, CA 90095-1476
United States
310-794-7601 (Phone)

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