How can a corporation and state be separated?

In the corporate governance literature, there is a widespread conception that state political interference in an enterprise decision making is detrimental to corporate performance. There is theoretical evidence from various studies that shows that political interference in company decision-making process negatively impacts their corporate performance in multiple ways.
Estimated Reading Time: 8 minutes

Introduction

Corporation and state are inextricably interrelated when it comes to give consequent value to political, economic, and corporate interests.

The concept of ‘state’ is defined by Max Weber as “an entity which possesses a monopoly on the legitimate use of physical force in a particular territory”.[1] While Miller characterizes the state as “an assemblage of practices, techniques, programs, rationales and interventions, employed in relation to the ‘arts of government’”.[2] When we closely study the Miller definition of state, it is easy to interpret the role of the state in corporate governance. The description suggests that it is precisely through the ‘arts of government’ the state has enacted its role in governing and controlling corporate enterprises through time.

On the other hand, Corporations are an integral part of the political setup through which the state governs. The word ‘corporation’ derives from the Latin word, ‘corpus’, which means ‘body of people’. A corporation is a legal entity or organization formed by a group of individuals with certain rights and liabilities separate from those of the individuals involved. They are the creation of state or at least sought their legal existence and various privileges from the state. It is the primary reason why some of the major corporations do not pay or pay very minimum tax to the government, not because they can lobby or subvert the system but because of their specific rights and privileges granted by the state.[3]

Political Control of State upon Corporation

The average economist probably thinks of corporation and state as separate entities. Here on the one side is the corporations- related to the economic field, and on the other side is the state- associated with the political field. The economic and political field is by and large separate and distinct from each other. While the government occasionally steps over in the corporate world to regulate certain activities, such a move has become a departure from the normal encroachment.[4]

Corporation has always been a fundamental part of how the state has governed and vice versa. The corporate bodies are subordinate to the state and can exist only if the state allows them to.[5] The interference of corporation and state these days in each other arenas have become so widespread that it has become complicated for us to presume both of the bodies working in their separate field. The political interference in the business activities and the money control in the political field is one major headache. The current situation demands separation of corporation and state for efficient working of both the fields. Many business sectors complaint about government regulation and the corporations often denounce state regulations and tax levies as irrational impediments to economic efficiency, operations and profits.

Additionally, in respect of Tax law, the impact of the intervention by the state on corporations becomes more troublesome. In principle, tax law is a very powerful instrument for the state to collect revenue from taxpayers who are duty-bound to pay tax to the government. Corporations are also not any exception to this obligation as they are equally bound to pay taxes as long as they are performing in tax attractive areas. However, despite it being an essential instrument, the government should make its tax law regime non-discriminatory at all cost. But in most cases, the tax regime or law is discriminatory on corporations as they levy flat rate of taxes on all tiers of corporations, treating unequal equally. It is in clear violation of article 14 of the Indian Constitution that embodies the idea of equality.

Moreover, politically affiliated corporations enjoy a competitive advantage over private corporations through tax lobbying and other privileges. The government grants excessive tax breaks to a particular group of corporations who are politically affiliated with them. It reduces their total liability, i.e. the amount of tax they have to pay or changes the tax system in a way that benefits them.

Need for Separation of Corporation & State

Despite some government-led efforts in shaping business activities, there remains a considerable disagreement on whether the state-led intervention in the economy should be permissible or not. The relationship between corporation and state can be complicated at times, as both have conflicting priorities and agendas. Still, businesses learn to work under government regulation, instead of going against it to save themselves from dealing with fines and other legal issues.

The state possess the power to coerce which private entities does not possess. The coercive power of the government is often seen in their regulations on enterprises. In contrast, some big corporations or other who is politically affiliated with the government in power can convince the government to use its coercive power to their benefit. As a result, regulations tend to get captured by these powerful entities who maximize their well-being at the expense of others interests. The benefits are, however stemming for both government and corporations in their respective fields.

The political factors remain the centre of our issue that comprises of various changing government policies. One of the state’s favourite methods to make its presence known in the economy is through taxes, and the same tool government uses to keep the pressure on corporations. Increase or decrease in tax is a key example of a political element in corporate governance where the government might increase taxes for some companies and lower the same for others.

Further, most economists believe that the levying of corporate income tax led to cause a substantial inefficiency. The levy of corporate income tax penalizes the corporate form of business organizations because their net income is first taxed at the corporate level and then taxed again when the income is paid to stockholders as dividends. A traditional justification for the treatment of singling out corporations like this is that they receive special benefits from the government, and hence should pay for them. The traditional rationale dates back to the 18th century when a corporate charter carried with it state-granted privileges such as exemption from specific laws and monopoly power. However, this rationale poses two crucial problems: First, if this is the case then all corporations and not just profitable ones should pay; and secondly the current corporate tax rates seem disproportionately excessive for this purpose.[6]

There is a negative impact of state intervention on corporate functions, which is why time calls for the separation of corporation and state for a stable and healthy economy.

Measures to separate Corporation & State

To understand how corporation and state can be separated it is imperative to know how the government can be restricted from controlling, i.e. politically controlling business activities. ‘State’ should be separated from ‘Corporations’ in precisely the same sense and manner in which it should be separated from the ‘religion’.

The state is supposed to respect every individual’s rights to profess any religious ideas they want and voluntarily organize religious and ideological movements. In essence, the concept should be made applicable in the same manner to the corporate world, where individuals are granted the right to produce what they want and organize into corporations.

The intervention should only be caused when there is a need to protect people’s rights, otherwise keep state and corporation separate from each other, if you actually want businesses to prosper. The government’s essential intervention is necessitated in some cases like resolving a contract dispute, enforcement of company laws and rules, and preventing individuals or groups of individuals from violating others’ rights.

The measures that are necessary to implement to successfully separate ‘corporations’ and ‘state’ are listed below:

  1. First, the state is required to stop interfering with business activities except in the cases mentioned above. It is pertinent to understand that separation is a two-way street. Meaning, it is impossible to separate corporations from the state until the state is separated from the corporations. When the state uses political tools to seek regulations on business activities, the concerned politicians necessarily invite corporate lobbyists to the political table. Some businesses try to manipulate the political rules to squash their competitors, and others simply seek to mitigate the political damage incurred to their ability to produce. The control of politicians over several business sectors such as business mergers, auto fuel standards, production of medical supplies, and others necessarily seek corporations’ involvement in the state. Therefore, it is a dire need that the government doesn’t intervene in those business activities.
  2. The second measure necessitates for the state to stop subsidizing corporations. The instances in which politicians support particular subsidies create corrupt relationships between business and state. Ideal capitalism includes strictly voluntary transactions and not forced wealth transfers, but today the mixed economy is all about ‘corporatism’ that is far from capitalism.
  3. The third recommendation is for lawmakers to create more vital legislation that prohibits the government from providing benefits and kickbacks to specific corporations through lobbying legislation and excessive tax breaks for a company where the taxpayers pick up the bill who would not need to otherwise the likes.
  4. Lastly, the tax law of the concerned country is recommended to be revised and reenacted with having separate schedules of income level that determines the rate of tax to be levied by different tiers of corporations who will pay according to their abilities. It will help private corporations to flourish in the market and compete with politically affiliated corporations. In this way, government intervention in granting specific rights and privileges to party-connected corporations will decline and pave the way for every corporation to remain on equal footing. The measure would act effectively even in removing the incentive for corporations to opt special tax loopholes.

That being said, the state’s best approach should be to give some tax breaks to small businesses, and come up with fair share taxes for wealthy corporations, and necessarily with anti-corruption legislation where neither a corporation can sponsor political activity, nor the government can control companies’ functioning via political activities.

Conclusion

The state is much more closely entwined with corporate enterprises that it is with its citizens. They taxes business to generate necessary revenue for their accomplishments and regulate the companies to prevent abuses. But the government regulations on business activities is now bothering the enterprises who often face that the excessive regulations have cramped their profits and restricted their freedom.

Even though it is not possible to have a separate demarcation on working of corporation and state, the increasing demand for efficient corporate governance management necessitates the separation of both from each other. The separation of corporation and state would stop the unfair lobbying of wealthy enterprises’ in political connection with the government. There is a need for sound corporate governance mechanism where there is less government intervention in the functioning of corporations. On that note, the aforementioned measures can be applied significantly to achieve this desired goal. After all, the key to success for a business is only possible if we preserve the role of government as a neutral spectator who intervenes only in certain circumstances.


[1] Weber M (1919) Politics as a vocation. Lecture to Free Students Society of Munich University, http://www. ne.jp/asahi/moriyuki/abukuma/weber/lecture/politics_vocation.html.

[2] Miller P (1990) On the interrelations between accounting and the state. Accounting, Organizations and Society 15(4): 315–338.

[3] Mathias Hein Jessen, The Corporate State, 2020, last assessed Jan 7th 2021, at https://www.tni.org/en/publication/the-corporate-state#sdendnote16sym.

[4] Keister, Albert S. “Are Government and Business Separate Entities?” Southern Economic Journal, vol. 2, no. 3, 1936, pp. 3–12. JSTOR, www.jstor.org/stable/1053191. Accessed 7 Jan. 2021.

[5] Hobbes, T. (1996). Leviathan, ed. Richard Tuck. Cambridge texts in the history of political thought. Cambridge & New York: Cambridge University Press, p. 230.

[6] Rob Norton, Corporate Taxation, last assessed Jan 7th 2021, at https://www.econlib.org/library/Enc/CorporateTaxation.html.

Hey there!

come here often?

Login To Come In