Taxing Conditions: The Fiscal Interest of the State and the Rise of Modern Corporate Law in America
At the end of the nineteenth century American corporate law changed completely. Corporations became easy to create and endowed with powerful rights, such as the ability to own other corporations. New Jersey pioneered the new laws, but other states soon followed, and using the new laws capitalists reduced the ruthless competition that was destroying their profits by consolidating many competitors into a few, mammoth, corporations. The result was a great wave of mergers that transformed the American economy.
The causes of this institutional change are poorly understood. The claim that the law changed because its new form was more efficient cannot explain why only some states changed their laws, and why New Jersey later restricted its permissive law. The claim that the law changed because of how the actions of powerful interests interacted with contingent conditions such as bad infrastructure investments and depressions are belied by that these conditions did not occur in New Jersey.
I argue that corporate law changed the way it did because some laws provided tax revenues that made politicians invested in those laws. Tax revenues provide a concrete link between the economy and the state, and an empirical measure of when laws are likely to change. Using multiple methods and new data, I connect tax revenues, and politicians’ understanding of those revenues, to failed and successful attempts to make corporate law more restrictive and permissive, over time as well as across the American states. This greater variation allows the development of a comprehensive explanation where previous research has resorted to contingent and historically specific explanations.
In the first part, I compare failed and successful attempts to make corporate law more permissive and restrictive in New Jersey 1830 - 1913, where modern American corporate law first emerged. I find that the tax revenues generated by corporate law made politicians invested in permissive laws, so that the law only changed when it did not provide the state with revenues. A paper based on the first chapter is available here.
In the second part, I test this hypothesis alongside ones derived from existing explanations, on the adoption of restrictive and permissive corporate laws across the American states 1888 - 1915. I find that in the Core states of the Northeast and Midwest, the higher the share of a states’ taxes that come from business taxes, the more permissive its corporate law will be. In the South and the West, this relationships is the opposite.
The last chapter explores potential explanations for why taxes worked in different ways in different regions of the U.S.