Limited Liability Special Corporate Privilege Funded by Taxpayers
|December 31, 2003||Posted by Staff under The Progress Report|
Special Privilege Should Be Stopped
Reward but No Risk
One of the biggest, most expensive handouts that taxpayers are forced to make is in the form of free liability insurance for corporations. Other forms of business, such as sole proprietorships, do not receive this privilege. It’s time for equal treatment and a level playing field — end the special privilege and let all businesses get their insurance from the free market.
Here is a news article being circulated by a group called Commercial Alert. The article originally appeared in the New York Times.
by Dalton Conley
Republicans are pushing hard to reduce the tax on dividend income, arguing that the government unfairly taxes it twice. Dividends come from corporate profits, which are taxed, and the individual stockholder who receives the dividend check also pays Uncle Sam. Therefore, President Bush argues, reducing or better yet repealing the tax on stockholders would treat dividend revenue like other income, reducing free market imperfections.
But if the Bush administration truly wants a free market economy, it shouldn’t stop there. It should also put an end to limited liability for shareholders.
Under current law, if I invest in an incorporated company, the only money I risk losing is that with which I bought the shares of stock. So if Exxon destroys a sizable section of Alaska’s coastline; if R. J. Reynolds directly contributes to the astronomical health care costs of smoking; or if Enron goes belly up, leaving many unpaid accounts, the most their victims can retrieve is the value of the corporation’s assets. Once the value of the company and thus the shares is driven down to zero, creditors and litigants are out of luck.
So why do public companies and their shareholders enjoy protection from the consequences of their actions? The history of limited liability dates back to the earliest days of capitalism when the British crown would grant this protection to companies in order to encourage risky endeavors to stimulate investment. In 1886, the United States Supreme Court found that the 14th Amendment intended to protect the rights of freed slaves granted corporations the legal status of persons, enshrining the distinction between corporations and their owners.
But in a globally connected age of overdevelopment, environmental hazards and corporate malfeasance, does it make sense to have society underwrite the money-making schemes of private individuals?
Though business executives would shudder at the notion, and claim that the economy would grind to a halt, ending limited liability moves us closer to a true “free market.” In a truly capitalist system, worthy investments would find ways to attract capital, in spite of risk. And possible scenarios exist. Two law professors, Henry Hansmann of Yale and Reinier H. Kraakman of Harvard, have suggested that liens could be assessed to the shareholders who owned stock at the time of legal judgment. This may seem overly burdensome to shareholders who have taken a beating by Wall Street, but an efficient market will quickly adapt to reflect the social risks that are now ignored and subsequently paid for by tax dollars.
I would even suggest that liability be tradeable, following the shares, and thus stock could trade at negative values. In practice, this means that the seller pays the buyer to take over ownership thereby offloading legal headaches and financial risk. The investor who gets paid to “buy” the shares is gambling that ultimately, the assessed liability will be less than what was paid for them.
New insurance markets would arise to protect investors in cases of a tort judgment or lien that led to substantial personal risk. Insurers would have an incentive to assess the risk of a corporation’s practices to the general welfare. Shareholders would become more involved in the business of the companies in which they invest. After all, who wants to risk their house on Ken Lay’s judgment alone? In other words, corporate oversight would be far stronger because it would be in the market’s interest.
There are potential pitfalls. For instance, investors could hide their assets abroad or insiders could hide risks until they unload their stock, but those kinds of problems already exist at the corporate and individual level. The division between the human person and the corporate person is one of the most taken-for-granted aspects of our economic system but one which leads to enormous inefficiencies and inequities. Fair is fair: let’s get rid of the dividend tax, but only in exchange for a real free market.
Dalton Conley, director of New York University’s Center for Advanced Social Science Research, is author of the forthcoming “The Pecking Order.”
To fight against the limited liability special privilege, get involved with the Geonomy Society.
For more on corporations and their privileges over other forms of business, read Fred Foldvary’s editorial on the subject.
For the results of a recent survey on Limited Liability conducted by the Benjamin Banneker Center, click here.
What’s your opinion? Tell your views to The Progress Report!