Is the government putting a 20% tax on dividends equivalent to the government owning 20% of the company?

Question

This question is about an answer user253751 wrote to one of my questions on Politics SE.

Consider a country where a government puts a 20% tax on oil and gas profits. Consider a different country where a government owns 20% of all oil and gas companies. There is no real difference - both governments are getting 20% of oil and gas profits, against the will of the customers (who would like the price to be 20% cheaper) and other shareholders (who would like the price to stay the same but their share of the profit to be 20% higher).

I do not understand this because it seems trivially obvious that the two situations are different. In the former situation where the government puts a 20% tax on oil and gas profits, the company makes less profits and all its shareholders receive a lower dividend. In the latter situation where the government owns 20% of the company, the company's profits remain the same and everyone receives the same dividend.

Concretely, suppose the float is 1 million shares, and the company makes $1 million which it pays in dividends.

• In the first situation, the company makes \$800k, so each shareholder gets \$0.80 per share.
• In the second situation, each shareholder gets \$1 per share, of which the government gets \$200k.

After a long discussion in the comments there it doesn't feel like user253751 and I are understanding each other, so I'm posing the question here instead: is there a real difference between the two?

Answer 1

Is the government putting a 20% tax on dividends equivalent to the government owning 20% of the company?

No, stock ownership entitles owner control over decision making in the company (via voting on CEO, board of directors etc). So trivially, 20% tax on dividends is not equivalent to government owning 20% of a company.

In addition, a there is also a difference since stock is an asset and thus wealth. If government owns 20% of a stock of a company and so gets 20% of dividends, the said government has both wealth equal to the value of 20% of a company and income equal to the 20% of dividends, whereas dividend tax only gives government income. So for example if the company has value 100 and dividends are 10, then government that owns 20% of company will have 20 wealth and 2 dividend income, whereas if government levies 20% dividend tax it has 2 tax revenue and no wealth.

The difference however does not come from after tax EPS. You are right to say that when government owns the company in your example after tax EPS is 1 and when there is tax after tax EPS is 0.8. This in itself is semantic difference since in both scenarios government has 0.2 income and private shareholders have 0.8 income.

The actual economic difference comes from extra control of the company and additional wealth or potential difference in incentives created by different scenarios, not income.

In addition in your question you also mention tax on profits, corporate tax is not equivalent to tax on dividend income since not all profits are paid out as dividends.

Answer 2

I agree with @1mufulon1's answer. Another difference is that the number of shares and therefore the government's stake doesn't stay static. A company will often issue new shares, whether to raise capital, or to reward employees, or destroy shares through stock buybacks. It's theoretically possible to have the company have to issue 1 extra share to give to the government per 4 issued or have the government destroy an extra one of theirs per 4 destroyed, if it's 20%, good luck replicating a tax rate of e.g. 22.7% since shares are atomic(in the mathematical sense) and you can't issue or destroy fractional shares.

Answer 3

In terms of how much of the income the government gets, yes, it's the same as the government owning 20%.

Say the company has \$1 million in profits that it wants to pay out in dividends. With a 20% tax, the government will get \$200,000, leaving \$800,000 to be distributed as dividends.

If the government owned 20% of the stock and there was no tax, then the company would have the full \$1 million to pay in dividends, of which \$200,000 would go to the government and \$800,000 to private stockholders. The net effect would be the same.

In practice, how the numbers shake out would depend on the details of the tax law. Does the government tax dividends? Or does it tax profits? Or something else? What are the exact rules?

As @1mufolon1 points out, a 20% dividend tax would not mean that the government owns 20% of the assets. A shareholder who wanted a pile of money now could sell his stock, receiving immediate cash at the cost of foregoing future profits. But the government can't sell it's right to collect taxes. Well, I suppose a government could pass a law giving it that right, but I've never heard of a government doing this.

Owning stock gives one a voice in management of the company. If you own 10% of the stock, you get 10% of the votes in how the company is run. The government's voice in how the company is run is unrelated to the tax rate. The government could charge a company very low taxes but have a long list of regulations that the company must follow. Or the government could charge high taxes and have only a short list of regulations. And governments do not normally make the amount of regulation dependent on the tax they collect from a company. That is, heavily regulated companies do not normally pay higher taxes than companies subject to lighter regulation.

So you could say that yes, sort of, in a sense, when the government imposes taxes on a business, the government is making itself a partner or shareholder in the business. But there are many differences in the details of how it works.

Answer 4

It is different.

Dividends are a distribution of profits. So the state would own 20% of profits distributed to shareholders. But a company can reinvest "profits" and turn profits into company growth. So shares will become more valuable. Or a company can just leave money in its bank account and not pay any dividend.

A company also has lots of freedom to change the amount of profit that it makes. Pay higher salaries, reduce prices, donate money to charities. Especially charities that its shareholders like.

And please check in which countries companies pay dividend taxes as all. For example, in the UK dividends are counted as income for the person receiving them. The company has no obligation (except an obligation not to pay out so much money as dividends that it cannot pay its bills).