The Rationales of Tax Entities

Abstract

The theoretical justification of a separate tax applicable to companies and other organizations is a long-standing, though still current issue object of research. Two approaches have been taken in this respect: On the one hand, it is argued that the need for an autonomous tax draws from the early 20th century belief that certain organizations are legal entities separate from their own founders, members and third parties in general (Entity Theory). The entity's ability to provide for a separate income tax is thus due to its qualification as an entity under commercial law. On the other hand, it is argued that the introduction and preservation of a tax which applies to taxable subjects different from physical beings is legitimate only for corporate organizations and, in particular, for the purpose of advancing the taxation which, after the distribution of dividends, company members will be subject to (Substitute or Proxy Theory). The corollary to this approach is the structural need for a legal regulation resolving the problem of double taxation - of companies and their members - ensuing from two distinct taxes being applied to the same income. I shall argue that none of the above traditional approaches is convincing; rather, the logical antecedent of a separate tax on income yielded by (or through) organizations is represented by one of their structural features: patrimonial separation, as referred to by the civil law. As a matter of fact, it is patrimonial separation - and, especially, its legal consequence: affirmative asset partitioning - that renders the ability to pay incorporated in the organization's income subjectively not attributable to any tax-payer other than the organization itself. There ensues the application of a separate tax on said income, to be paid by the organization itself which produced it. Such an interpretation may explain why organizations devoid of legal personality under commercial law (such as trusts) are equally subject to a separate income tax; and may rationalize - from a strictly legal perspective - the double taxation applicable to the income of corporate organizations.