Profits and dividends usually go hand in hand: When a company is doing well and making money, it ultimately distributes part of its profits to its shareholders. And could paying taxes affect the size of that pie? In some cases, yes, according to a recently published study analyzing the behavior of more than 4,300 listed companies in 26 European countries. The document concludes that if the share price increases generously, dividend payments will be higher if shareholders have to pay taxes on the assets. A phenomenon that, according to the work “Individual Wealth Taxes and Corporate Payouts” (in Castilian), usually occurs in companies where ownership is highly concentrated and the partners own the shares directly. This dynamic is in turn accompanied by a lower level of investment after the profit distribution.
“Our evidence is consistent with the hypothesis that a significant number of large shareholders who have liquidity needs due to wealth taxes cause their companies to meet these needs by paying unusually high dividends,” says the study prepared by Gaizka. Ormazabal (IESE) , Raùl Barroso (IESEG School of Management) and Donald N'Gatta (MDE Business School). For example, for companies whose managers face an increase in wealth taxes, dividends are about 3.5% higher.
The academic work analyzes the impact of wealth taxes on dividends and investments in Europe over a period of almost two decades, from 2000 to 2017. The 4,381 companies that are part of the sample, subject to a total of 39,503 observations, belong to different sectors, from agriculture to the biotechnology to the chemical industry, with the exception of financial companies and those providing public services, as their dividend policy is very different from the others due to their high level of regulation. .
“If the share price rises sharply, the shareholder's wealth automatically increases and he may have a liquidity problem to pay the wealth tax,” explains Gaizka Ormazabal, professor at IESE and co-author of the study, via video call. “Causality is always difficult to prove with statistics. To see whether our thesis is credible, we focused the analysis on each company and examined the evolution of its behavior over time to ensure that there were no third-party factors that could influence dividends or shares. The phenomenon is particularly noticeable in family businesses – in the sense that ownership is concentrated in the hands of a single person or a few people in the same family – known in English as “closed held”, and in companies in which “natural persons have direct ownership”. of shares.”
“Family businesses are particularly sensitive to wealth taxes because the wealth of their controlling shareholders is closely linked to the market value of the company,” the document concludes. “These payments,” he adds, “reduce the funds available for profitable investments,” which can jeopardize the long-term health of the company.
More incidence in the north
The wealth tax has been abolished in many countries in recent years, although the debate about its appropriateness is more than lively. The pandemic has served as a fuse to get it going again, and the energy crisis has added even more fuel to the fire. Spain is now the only EU country that maintains a full wealth tax – two: the regional tax on wealth and the state tax on large wealth. Other countries like France have had it in the past and suppressed it. In Europe, Norway and Switzerland also honor the richest.
The work of the three economists does not go into detail about each country, except to quantify the number of companies involved in the study and their type – in the case of Spain there are 128 companies, 68 of which have a high concentration of ownership 19 They are considered family businesses classified – Ormazabal reiterates, however, that geographical differences can be observed given the data processed. Dividends rising when shareholders face a significant tax increase is more common in northern countries such as Norway. “It is possible that they will be more strict on tax issues. In France and Spain the effect is less pronounced,” he points out, a circumstance that may be linked to the existence of instruments exempt from paying wealth tax.
However, the teacher points out that this dynamic may be underestimated in general because it only takes into account one channel, no matter how important, through which the wealth tax influences business decisions: dividends. “It’s just a type of financial asset. Taxpayers may have real estate, funds… When the real estate market rises, assets may increase and more liquidity may be required to pay the tax.
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