The Impact of Corporate Taxation on the Principal Agent Problem

The principal agent problem has been widely addressed in the literature, primarily as part of organizational law and financial theory. The literature has thus far ignored the role tax law plays in addressing principal agent problems. On occasion, it has referred to one section or another in the Internal Revenue Code that supports corporate law, but it has not yet concretely highlighted tax law’s impact on agency problems, much less tax law as a mechanism to address these problems. This work is based on the proposition that we can use corporate tax law to mitigate the agency problem. It examines the agency problem through the eyes of tax law. Prima facie, a direct relationship between tax legislation and the principal agent problem may seem questionable, however, this work attempts to verify quite the opposite.