The Misuse of Tax Incentives to Align Management-Shareholder Interests

Abstract

The U.S. tax system contains many provisions which are intended to align management of large publicly traded companies more closely to stockholders. This article shows that many of the tax provisions that have been adopted are of questionable effectiveness because they fail to address the complexities of stockholder-management relations in attempting to motivate management to act in the best interests of stockholders. The article proposes that rather than Congress attempting to identify the best way that it can use the tax system to motivate management, Congress should eliminate tax provisions which subsidize management's inefficiencies in order to encourage stockholders, themselves, to find the best ways to motivate management. The article identifies three features in our tax system that subsidize managerial inefficiencies and that Congress should eliminate: (1) the preferential tax rate for capital gains, (2) the step-up in basis for stock at a stockholder's death, and (3) the lower tax rate for corporate taxable income as compared to the rate for individuals.