ABSTRACT
Since the time of Gardner Means, economic theory has struggled with the separation of ownership and control that lies at the heart of modern corporate structure. Governance of modern corporations rests on a paradox. It is necessary to give management very wide latitude in directing the business affairs of the corporation, but this freedom seems inevitably to confer a freedom to exploit providers of capital. The greatest fallacy in corporate governance is that the management should be the final arbiter of both reported earnings and dividends. The Internal Revenue Code has historically given the owners a tax incentive to reinvest the profits in the business. The tax treatment of corporate profits amounts to a very high tax rate because corporate profits are in effect taxed three times: first as corporate income, then as capital gains, and finally as personal taxes on dividends. When a taxable shareholder sells shares he pays tax on the realized gain.
