Corporate taxes can be good for shareholders

Sunday, March 6, 2022

Why some actually want their companies to pay tax

By Andrew Bauer, Assistant professor

Picture of Andrew Bauer

There is a prevailing assumption that, in the name of profit, shareholders don’t want their corporations to pay taxes. It’s easy to see how less taxes should mean more money in their pockets, but it turns out this is a common, yet understandable, misconception.

Contrary to this belief, shareholders (people who have invested money in a company in exchange for a share of the owndership) sometimes prefer their corporations to pay taxes to maximize cash flows. But, how can that be? Take common news stories about offshore tax schemes, creative tax planning and corporations reducing their taxes, for example. These stories all seem to imply that less taxes mean higher cash flows for both corporations and shareholders.

It turns out that isn’t always true. Certain incentives, like shareholder credits that reduce the amount of tax owed on dividends, actually encourage shareholders to prefer their corporations pay the standard tax they owe — not a lower tax — to ensure higher cash flows for themselves.