What makes companies dodge taxes?
Few tax issues generate more public frustration than big corporations paying little, or sometimes nothing, in federal income tax. Since 2018, U.S. corporations have faced a 21% federal corporate income tax rate, the lowest rate in decades and down from a top rate of 53% in 1969.
Corporate tax avoidance factors often stem from benign influences rather than deliberate tax manipulation. A new study from The University of Texas at Austin examines 30 years of research on corporate tax avoidance and identifies the most significant drivers of differences in effective tax rates among U.S. corporations. Investment opportunities, financial constraints, and operating characteristics explain the majority of tax rate variation, accounting for 34%, 21%, and a substantial portion respectively.
Factors such as CEO pay, board composition, ownership structure, and company size have relatively little impact on tax rates. Individual managers also leave a unique tax signature that follows them between companies, explaining 24% of tax rate variation. Policymakers seeking to increase corporate tax receipts should consider targeted rules and adjustments to incentives, informed by these key drivers of corporate tax avoidance.
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