A Critique of the Corporate Legal Persons Doctrine: The Case of Corporate Taxation

In his commentary in The Wall Street Journal in 2010, Michael Boskin went over the disadvantages in levying an income tax on corporations. Within his argument, he observes, “Of course, the corporation is a legal entity; only people pay taxes.”[1]  In so doing, he transcended, if only for a moment, his own approach that was oriented simply to giving the pros and cons of corporate taxation.  His observation is significant, and it gives us a launching pad of sorts by which we can approach the corporate income tax as a itself as a concept, rather than simply assessing its utility. In short, corporate taxation is an oxymoron if only humans pay tax. In fact, we can conclude from Boskin's remark that the doctrine that corporations are legal persons has been incorrectly construed. 

Treating a “legal entity” as if it were a tax-payer is unnatural, and thus gives rise to the double taxation problem.  It is interesting that Boskin uses the word “entity,” which is not the same as “person.”  That is, to argue that corporations should not be taxed directly, he implies that the legal-person doctrine is not valid (i.e., only humans rightly pay taxes). 

I contend that Boskin was correct in referring to corporations as legal entities as distinct from humans in terms of taxation. I submit that he did not go far enough, for it is possible to narrow the legal-person doctrine to mean only that stockholders' personal assets are protected in the event that a corporation has accrued so much in liabilities that they cannot be paid off on time by the corporation. In this case, the term "legal person" should be changed as it would be a misnomer and thus liable to be confused. 

In fact, to treat or consider a corporation as a person in any sense is anthropomorphistic.  Put another way, an association of human beings does not constitute in itself a person in any sense. To presume otherwise is to make a category mistake between a legal concept and a human being.  This error is evident, for example, when someone says, “GM says X.”  Only human beings can talk, so it would be better to say that GM's management issued a statement. 

Furthermore, an organization cannot be a moral agent. Only the persons in an organization, not the latter itself, have human brains. Only these can entertain the thought denoted by should. Even from merely descriptive thoughts should cannot come, according to David Hume's naturalistic fallacy. Additionally, to make an ethical decision requires cognition that a human brain rather than organizations in themselves have. In fact, organization itself is merely an abstraction. You can not point to GM down the street, for GM is not just its headquarters' building or one of its plants. 

Therefore, applying person to an organization can be deemed a category mistake--one that has been enabled by a societal blind-spot. 

On business ethics in organizations, see Skip Worden, Cases of Unethical Business: A Malignant Mentality of Mendacity, available at Amazon.

1. Michael Boskin, "Time to Junk the Corporate Tax," The Wall Street Journal, May 6, 2010.

Self-Delusion Enabled by Religion: Former U.S. House Minority Leader Tom Delay and Monopolist John D. Rockefeller

It is hardly news that religion, even one based on divine love reaching down to “love thy neighbor,” can be stretched or simply ignored as needed by the desires for power and money. When these two are both engaged, religious rationales may be attempted nonetheless. I have in mind here the cases of former U.S. House Majority Leader Tom DeLay (R-TX) and the monopolist John D. Rockefeller. Just in evoking their Christian faith to justify their sordid conduct in politics and business, respectively, these two men may be seen as astounding cases of the length to which adherents can go in using religion even in spite of obvious hypocrisy.

The full essay is at "Self-Delusion Enabled by Religion."

Climate Change: An Outsider in Democracies

The U.S. House of Representatives was created in part as an outlet for the immediacy of a people’s passions; other governmental institutions at the federal level provide a check. The term of a House representative is only 2 years, whereas that of a U.S. senator is 6 years and that of the U.S. president is four. So presumably societal  or even global  problems requiring immediate action find pressing representation in the House, whereas the perspectives of U.S. senators and presidents, being limited to six and four years respectively, are not long-term-oriented enough for problems that could blow up in decades. To register in the crowded minds of House representatives, a long-term problem yet in need of immediate attention must trigger the immediate passions of the constituents unless the representatives value principled leadership (i.e., acting in the best interests of the constituents and the country). Yet passions demanding immediate action tend, I submit, to involve anger. Climate change is thus excluded, and the long-term forecasts do little to impress upon a people how urgent rectifying action really is. Even if the scientific reports of current conditions emphasize extant dramatic changes (not to mention future forecasts with disastrous implications for humanity generally and particular regions, immediate passion is not sufficiently stirred for the U.S. House at least to prioritize addressing the problem.

A report published in January, 2019 indicates that the world’s oceans were then already 40% warmer than a U.N. panel had projected in 2014.[1] Although the data was not yet in to be included in the report, 2018 was expected to the warmest on record for ocean temperatures.

Considering that the oceans had been providing “a critical buffer” in having “slowed the effects of climate change [in the atmosphere] by absorbing 93% of the heat trapped by the greenhouse gases” that were from human uses (presumably including the methane released as the permafrost melts), the reported acceleration of ocean warming should have sounded over the lands as a clarion call for immediate action.[2] The most important implication from the report is that the oceans would absorb far less of the extra heat from the atmosphere if the oceans’ temperatures get high enough, which likely would come sooner than projected, the atmosphere would then show more and more of the immediately noticeable increased heat in the atmosphere. Although losing much or all of the “absorption drainage” by virtue of the seas would likely register very starkly into immediate effect as people spend time in the atmosphere—and thus likely trigger immediate governmental action, awareness of the implication before that point is likely too indirect to register on the awareness of constituents.

Even though Thomas Jefferson and John Adams agreed in retirement—long after they had sparred like dogs—they agreed that a viable republic (and we could add climate) requires an educated and virtuous citizenry (as it elects the elected government officials in a representative democracy). So universities in the U.S., unlike the E.U. and Asian countries, require that students wanting to become a lawyer or physician first get a degree in another school of knowledge, such as in the Liberal Arts and Sciences. To be sure, such a broad education admittedly helps in being able to make inferences, such as that when the oceans cut back drastically in what the amount of the extra atmospheric heat they can absorb, the atmosphere will warm up rather quickly. Still this is not enough to result in a “wake-up call,” for the proportion of college-educated adults in a given population has not been high enough. In other words, too many voters are not likely to connect such dots and thus will only be motivated to urge immediate governmental or global action with enforcement powers when the atmosphere has gone into “hyperdrive” in terms of warming that can be dramatically felt. Pain, it seems, like anger, can register as an immediate passion of the people whose representatives in at least short-termed offices will be motivated to act upon.
In a general sense, even designing one governmental institution, such as the U.S. House of Representatives, to give immediate passions influence in government is not enough for problems such as climate change to be treated as priorities. The fault extends ultimately down to human nature—how our brains are hard-wired and socially conditioned—so it may be said that the design at least of the U.S. Government is faulty with respect to human nature. In the U.S., a culture wherein the instant gratification of consumerism and quarterly earnings reports are given undue influence at the expense of self-restraint and a longer-term perspective and motivation, a problem like climate change wherein the immediate baleful effects are mitigated by the oceans falls between the cracks. This, I contend, is a major flaw in that the constitutional design has a gaping hole into which problems that are dramatic primarily in the future fall. Both in business and government, systemic design should be redesigned to give due emphasis—and even more so as to counter both the short-term-oriented American culture and human nature—to problems whose immediate effects mask the disaster coming in the future. It is as if an earthquake were reported and yet officials in cities on a coast would not recognize the obvious implication that a tsunami could come so an alarm should sound immediately rather than when the gigantic waves could be seen.  

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1 Lijing Cheng et al, “How Fast Are the Oceans Warming?” Science 363 (no. 6423), January 11, 2019.

2. Kendra Pierre-Louis, “Ocean Warming Is Accelerating Faster Than Thought, New Research Finds,” The New York Times, January 10, 2019.

News to the Wall Street Journal: The E.U. Has a Common Market

The European Union has a common market. This would seem to be news to The Wall Street Journal, at least back in 2010. This is not to say that the E.U. is a common market, for the E.U. is much more than an economic market. For instance, the Union has governmental institutions, including a parliament, a senate (i.e., the European Council), an executive branch (i.e., the Commission), and a supreme court (i.e., the ECJ).  So it is surprising when journalists forget that the E.U. even has a common market by treating each of the States as having its own economy. To be sure, regions of the E.U. perform differently economically.  In the U.S., the States in New England, as well as New York, and California tend to have much higher GDPs than say South Carolina, Wyoming, and Iowa. Therefore, I contend that The Wall Street Journal erred in applying the concept of contagion to the E.U. financial crisis of 2010. 

A contagion occurs “when a loss of market confidence in one economy transmits to others.” It can occur through trade connections, economic similarities, and financial linkages. There are no “trade connections” within the E.U. because there is a common market within its borders. Economic similarities and financial linkages naturally exist within an economy; they need not evince contagion. 

In terms of the E.U. States that were variously suffering from budget deficits, high government debt and low growth in 2010, both the problems and solutions can be viewed in systemic terms with respect not only to the state governments, but also to the EU in terms of its common market and governance. Reducing the E.U. to its States misses this point and, frankly, is rather antiquated. 

Beyond the financial matters in the E.U., the reporting itself has been excessively rooted in “the same old, same old” at the expense of a changing world.  In other words, perspectives seem to have a nasty habit of being too sticky or rigid, and this is a problem that may dwarf those facing the E.U., as it has existed only since 1993, much less than the U.S., where in its first century it was common to view the member states as countries in themselves. Though I do not think contagion was much applied to the effects of one economy on another--perhaps because less denial existed on the political nature of the U.S.

Source: Tom Lauricella, “Fears of Domino Effect Pervade Europe,” The Wall Street Journal, November 24, 2010, pp. C1-2

Wall Street Snuffed Out President Clinton's Goal of Homeownership for the Poor

It is one thing for the head of a government (or a government’s executive arm) to set a praiseworthy goal that is in the public interest, and quite another thing to rely on the financial sector to implement it. Finance has its own means tied to its own goals, with plenty of greed in the mix. Governmental officials may tend to minimize the potential damage from ego-laden greed to the goals of public policy. Such policy ideally strives for the good of the whole, whereas the goals of a private sector of a part. This could account, at least in part, for the financial crisis of 2008 and the continuing bear market in housing in much of the U.S.

According to The Wall Street Journal, housing prices had fallen for 57 consecutive months by May 2011.[1] Even though the recession had officially ended in June 2009, the real estate market still had yet to hit bottom.[2] Since the housing peak in 2006, home values nationally were down 29.5 percent, according to Zillow.com. Compared to the same time in 2010, prices were down 8.2 percent in the U.S. markets. In that year, house price depreciation had slowed or stabilized because of tax credits of up to $8000 that expired during that summer. Accordingly, negative equity became even more prevalent in the first quarter of 2011, when 28.4 percent of all single-family homes with mortgages were "underwater."[3] Monthly declines for February and March were "really staggering," according to Stan Humphries, Zillow's chef economist. He claimed that the declines reflected "the true underlying demand," which was "being completely overwhelmed by supply."[4] Fannie and Freddie sold more than 94,000 foreclosed houses in the quarter; this represents 23% more than in the previous quarter.[5] The increase in supply from the foreclosures was at relatively low prices, hence the impact on the market was particularly depressing.

A declining housing price translates into lost wealth for the homeowner. When home values decline, the values of mortgages often do not go down as well. Homeowners lose some of their equity, or the stake they have in their home. When equity becomes negative—that is to say, when the value of a mortgage exceeds the value of the property—homeowners become especially vulnerable to default and foreclosure. “Falling home prices can create a vicious cycle. When a property falls into foreclosure, it tends to depress the values of properties around it, making those homes more likely to experience a similar fate. [In 2010], nearly 2.9 million homes received a foreclosure filing, and more than 2.8 million homes got one in 2009.” based on the data provider RealtyTrac.[6] More foreclosures further reduced the value of residential mortgage-based securities, which in turn reduced the asset-values and returns of companies and individuals investing in the CDOs (collateralized debt obligations) worldwide. This investment asset essentially has mortgage-borrowers pay the holders of the respective CDOs, whose value is thus based on the value of the underlying mortgages.

Problematically, the holders of the CDOs, not the originator of the mortgage, assumed the risk that the mortgage borrowers might stop their mortgage payments. The mortgage servicers had sold their mortgages to an investment bank such as Lehman Brothers, which in turn would pass the then-securitized mortgage-based bonds on to investors such as Deutsche Bank and the two major banks of Iceland. Neither companies such as New Century (or Countrywide) nor investment banks like Lehman would face any risk unless they happened to be holding a significant number of the risky mortgages (or real estate) when the merry-go-round finally stopped in 2008.

Countrywide was bought up by Bank of America (by Ken Lewis, CEO at the time) and Lehman Brothers went bankrupt. Both Lewis and Dick Fuld (of Lehman) could be said to be empire-builders—meaning expansion at virtually any expense and even as an end itself. Pure ego plus greed. New Century and Lehman both assumed that they would never get caught with their pants down holding toxic mortgages. They were both wrong—oh so wrong. To be so wrong and yet blame the consumers is, at the very least, bad form.

Unfortunately, the housing market was “plagued by scandal” in the first quarter of 2011.[7] Homeowners and investors filed “numerous lawsuits alleging that big banks misplaced or even faked crucial mortgage documents.” After it was “revealed that companies that processed foreclosures signed thousands of documents daily without even reading them, potentially violating the law, some of the biggest banks temporarily halted their foreclosure proceedings” in the fall of 2010.[8] I suspect, however, that the failure of the underwriters (and compliance folks) is a red herring; most of the sub-prime residential mortgages required no documents proving income or even a job, and many of those mortgage applications contained lies known or even encouraged by the brokers. Not unexpectedly, the brokers and borrowers have differed on whether the latter should be expected to have resisted the, “It’s ok, really. Trust me,” from the “professionals.” In any case, the (in many cases) first-time homeowners were used, and the greed of the mortgage producers was ultimately behind it.

The claim, for example, made by some mortgage brokers and Wall Street securitization arrangers that the borrowers should have somehow known better than to sign low- or no-document subprime mortgages with steep ARM resets of up to double-digit interest rates is more than just disingenuous; the brokers had assured the potential homeowners that the inevitable increase in home equity appreciation from the rising housing market would give them the 20 percent equity stake that was necessary at the time to refinance into a fixed mortgages at a decent, constant interest rate. The brokers did not care whether the borrowers enabling the double commissions could make the higher ARM (adjustable rate mortgage) payments in case they might kick in. One might even say that the system was rigged by the mortgage-producing companies such as Countrywide at the expense of first-time mortgage-borrowers. Preying on the newbies, in other words, could characterize the system’s basis. Of course, such preying is unethical, for it puts others in harm’s way unless the prey should have known better, which I dispute. In short, it was not a fair fight when the harm came as even AAA-rated subprime (i.e., risky) mortgage-based CDOs ruptured in the financial crisis of 2008. 

In conclusion, although Clinton’s goal of putting poor people in their own homes had been laudable, constructing ARM mortgages with resets that low income people could not afford and relying on a rising market to obviate them was a recipe for years of a bear housing market. In other words, the system that the financial world established blocked Clinton’s goal from being sustainable, and thus achieved. Of course, Wall Street was not in the game to do Clinton’s bidding; finance had its own goals, which went on through two terms of George W. Bush in the White House. In retrospect, Clinton should have used government regulation to establish a viable system in sync with the goal rather than allow his henchmen—most notable Alan Greenspan at the Federal Reserve, Robert Rubin, Secretary of the Treasury, and Larry Summers also of the Treasury, to push Congress to keep the CDOs unregulated. In other words, Clinton, in trying to position himself in the political middle, followed Carter in adopting a deregulatory position even as it ultimately rendered his laudable goal unattainable and even reckless.

See Essays on the Financial Crisis and On the Arrogance of False Entitlement, both available at Amazon. 

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1. Nick Timiraaos and Dawn Wotapka, "Home Market Takes a Tumble," The Wall Street Journal, May 9, 2011, pp. A1-A2.

2. William Alden, “Home Prices Fall Again in Biggest Drop since 2008,” The Huffington Post, May 9, 2011.

3. Ibid.

4. Nick Timiraaos and Dawn Wotapka, "Home Market Takes a Tumble," The Wall Street Journal, May 9, 2011, pp. A1-A2.

5. Ibid.

6. William Alden, “Home Prices Fall Again in Biggest Drop since 2008,” The Huffington Post, May 9, 2011.

7. Ibid.

8.Ibid.