Allow the incorporated non-limited liability corporations in the United States to pay no capital gains taxes if they are owned by individuals or other non-limited liability corporations. And limited liability holders would have to pay the capital gains taxes.
Few firms would take up this offer, but it is possible that some banks would and that these banks would behave far more cautiously.
Perhaps far fetched?
In the US, double liability for bank shareholders was common up to the Great Depression. All American investment banks were partnerships into the 1970’s and the last one, Goldman Sachs, only converted itself into a limited liability corporation about a decade ago.
Axel Leijonhufvud is the inspiring proposal, but his proposal is to require double liability for employee shares. His proposal is interesting but I see several problems.
- It would decrease the incentive for employees to hold their stock once it vested or otherwise became sellable under various programs. At best they would sell these shares and buy regular class A stock, giving them relatively small holdings of these restricted shares.
- It is all stick and no carrot. As such, because employees are holding on to a greater liability with their shares we should expect them to demand more of them, giving them even larger compensation packages.
- This might make them too risk adverse, in the sense that they are taking less risk than is either socially optimal or desired by their shareholders. Yes, risk reduction is a feature but it can be taken too far
- It will incentivise employees to demand relatively more cash compensation, with no incentive alignment, again because it has no compensating sweetener.
- Senior employees will have greater incentives to leave the firm than junior ones because they have greater outside wealth to lose. If employees have little outside wealth to capture this has no incentive effect, and I doubt we want the most experienced bankers leaving to start hedge funds and private equity shops when they can add more value at the banks but for misaligned incentives from regulatory problems.
