LAKEWOOD RANCH, FL, January 25, 2023 /PRNewswire/ — A new study released by the American Accounting Association finds wealth taxes in Europe have an unintended consequence: increasing dividend payouts to help executives with large stakes pay their taxes.
“Our study introduces a new consideration in the wealth tax debate,” says Evil OrmazabalCorresponding author of an article on the work and professor at the IESE Business School at the University of Navarre. “Specifically, we find that wealth taxes can have a questionable effect on corporate decision-making.”
While this research focuses on wealth taxes in Europethese findings may also inform efforts in other countries—including United States – to apply similar taxes.
Wealth taxes are charged as a percentage of an individual’s total net worth, which is usually calculated as the sum of the individual’s taxable assets—such as investments—minus the value of the individual’s debts. For many corporate executives, much of their wealth is in the form of stock in their company. As the value of these shares rises, so does the tax on the executive’s wealth.
This can be a challenge because while an executive’s wealth may consist mostly of stocks, taxes must be paid in cash. One way to solve this problem is for the CEO’s company to increase its dividend payout.
To see if this is happening and how it affects the companies concerned, the researchers assessed publicly available data on 4,381 companies based in European countries that have or had wealth taxes between 2000 and 2017.
The researchers found that closely held companies, especially family firms, are more likely to increase dividends when majority shareholders face a sharp increase in wealth taxes. The researchers also found that these higher payouts were associated with declines in subsequent investments – and caused lower stock returns.
“Tax-driven dividend increases may be beneficial to majority shareholders, but may not be in the best interest of the company — which could use those funds to finance profitable projects,” says Ormazabal. “In other words, increasing dividends to help an executive meet tax obligations can hurt the company and ultimately other shareholders.”
“Wealth taxes can also help reduce social inequality, which is valuable in itself,” says Ormazabal. “However, we believe it is important to better understand the diverse – and unexpected – consequences that may be associated with the implementation of wealth taxes.”
The paper “Individual Wealth Taxes and Corporate Payouts” is published in The accounting review. The paper was co-authored by Raúl Barroso of the Université de Liland Donald N’Gatha of MDE Business School in Côte d’Ivoire.
The American Accounting Association (www.aaahq.org) is the largest community of accountants in academia. Founded in 1916, we have a rich and respected history built on leading research and publications. The diversity of our members creates an environment conducive to collaboration and innovation. Collectively, we are shaping the future of accountancy through teaching, research and a powerful network, ensuring our position as leaders in accountancy.
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SOURCE The American Accounting Association