What is the justification for the U.S. corporate tax? Scholars have provided various potential explanations for this question. Yet, no explanation has gained consensus among scholars and, indeed, this article claims that none of the current explanations is convincing. The main contribution of this article is introducing the corporate governance effects of the corporate tax to this arena. The article claims that taking into account the corporate governance effects of the corporate tax increases the allure of each one of the potential justifications for the corporate tax.

The article starts by describing (and expanding) the literature regarding the potential corporate governance effects of the corporate tax. First, because diversion of corporate value towards managers (or controlling shareholders) reduces corporate tax liabilities, the Internal Revenue Service has an incentive to prevent and detect such diversions. The Internal Revenue Service is de facto the largest minority shareholder in almost all corporations. In corporate governance terms, there is an alignment of interests between the non-controlling shareholders and the IRS. The mechanisms aimed at enforcing the corporate tax make it also more difficult for controlling shareholders to divert corporate value to their own advantage. In other words, because managerial diversion hurts both tax authorities and noncontrolling shareholders, the two parties have a common goal: reducing managerial diversion. The article further notes that the corporate tax can have a comparative advantage in protecting investors and maintaining efficient markets relative to the SEC and financial auditors. For example, in auditing a corporate tax return, the IRS can (and in fact does) turn not only to the corporate’s own returns for past years, but also to returns filed by related corporations, partnerships, and individuals, including returns filed by customers, suppliers, employees, shareholders and payors of various type of income subject to income gathering.

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