Wednesday, February 22, 2012
How does tax policy affect the behavior of corporations? In the midst of national debates about the corporate tax rate, job creation, and international competitiveness, the dizzying complexity of the tax code can make it difficult to see the jungle through the vines. Does tax policy make U.S. firms grow or shrink? Do firms respond mainly to economic forces or tax incentives? This Essay goes back to foundational ground—Coase’s inquiry into why firms exist at all—to gain some traction on these important questions. I make two main claims. First, tax law incentivizes firms to expand the boundaries of the firm beyond what we would observe in a world without taxes. Tax policy favors larger firms. Second, firms often respond to this pressure by expanding the legal boundaries of the firm while leaving the underlying economic relationships largely undisturbed. What we observe is an expansion of the legal boundaries of firms and a smaller distortion of economic production.