The result is a de facto obligation.

It is important to distinguish between corrective taxation that aims to internalize negative externalities, and tax penalties that are used to ensure compliance with a particular rule regardless of the externalities involved. 211 A sufficiently high tax penalty can be used to enforce a de facto ban or obligation. For example, the 30 percent withholding tax imposed on certain payments to non-participating foreign financial institutions under the Foreign Accounting Tax Compliance Act was adopted as a tax penalty to achieve the full cooperation of foreign financial institutions. 212 One consideration that might support using tax penalties rather than a ban is the political ability to legislate these penalties. Another consideration is institutional: which agency should enforce this rule? The IRS is likely to enforce the tax penalty, whereas the SEC is more likely to enforce a ban imposed on publicly traded firms. 213

It is possible that the intercorporate taxation in the United States is a tax penalty that operates as a de facto ban, although it still allows pyramidal structures where the benefits are large enough. A few years ago, Israel adopted a ban on a pyramidal structure with more than two levels. 214 A controlled firm can control no more than one other firm. 215 If the lower firm controls another firm, a court will appoint a trustee to sell the remaining firm. 216 The Israeli legislature considered and rejected following the American model of taxing the intercorporate dividends. 217 It is unclear which model is superior, though it seems that either a ban or a tax penalty that is high enough can achieve similar results.

A corrective tax on pyramidal structures should be set on the negative externality resulting from that structure. 218 The inefficiencies associated with pyramids increase where the gap between voting rights and cash flow rights are larger. 219 Therefore, corrective tax should increase in a similar manner. The current tax rules in the United States impose a higher tax on holdings lower than 20 percent, a lower tax on holdings between 20 and 80 percent, and no tax where the holdings exceed 80 percent. 220 This may serve as a very rough approximation of the negative externalities that increase where the controller's share is lower. One advantage of having these three categories is the simplicity of this rule. However, imposing a similar tax where the holding is 21 percent and where it is 79 percent cannot be justified on corrective grounds, as the externalities should be very different. In addition, imposing a higher tax on intercorporate dividends where there is no effective control--where the holding is lower than 20 percent--would be hard to explain as a corrective measure.

If the negative externality decreases with ownership, the tax on intercorporate dividends can track this relationship by adjusting the tax to the ownership rights. We should find the level of ownership which enables an effective control--for example, 30 percent--and the level of ownership which is high enough to provide sufficient incentives to the owner--for example, 80 percent. If the negative effects decrease linearly, the tax should follow this by decreasing from a high tax rate, where the ownership is 30 percent, to a zero tax rate, where the ownership is 80 percent.

One advantage of optimal corrective taxation over a ban or a tax penalty--that serves as a de facto ban--is that the former does not prevent efficient pyramids, where there is a value-maximizing reason to have a pyramidal structure. 221 However, assessing the accurate negative externalities associated with different pyramidal structures would be very hard. 222 A corrective tax which is too low would result in a social cost from having many inefficient pyramids, whereas a corrective tax which is too high would be a de facto ban. In addition, it may be more politically feasible to adopt a tax, including a tax penalty that is a de facto ban, rather than an outright ban. 223