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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?

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  • $\begingroup$ In the second situation, how much do the shareholders get minus the government? $\endgroup$ Commented Nov 21, 2022 at 14:42
  • $\begingroup$ If every shareholder owned one share, in the second situation you'd have 800k shareholders while in the first situation you'd have a million of them. Why does it matter? $\endgroup$
    – Allure
    Commented Nov 21, 2022 at 14:47
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    $\begingroup$ I don't think we're going to get anywhere, so I won't be responding further, until someone writes an answer. $\endgroup$
    – Allure
    Commented Nov 21, 2022 at 14:58
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    $\begingroup$ Is part of the argument that the company pays 100% of its profit in dividends? How does that change the argument if a company pays, say, 10% of its profit in dividends (which is more realistic)? $\endgroup$
    – D Stanley
    Commented Nov 21, 2022 at 15:05
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    $\begingroup$ @Allure A possible way of comparing: if there are 80 stocks in the beginning, and the company has to print 20 new stocks to give to the government, then the effect on the "other" shareholders' dividend is similar. $\endgroup$ Commented Nov 22, 2022 at 0:33

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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.

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  • $\begingroup$ Stock ownership doesn't necessarily entitle any control, stock may be non-voting. Also, a point of difference that wasn't mentioned is the claim on assets. For example, in case of a liquidation event, ownership of stock (or debt) would entitle the holder to compensation, which is not true in case of the taxes being discussed here. $\endgroup$ Commented Nov 22, 2022 at 18:34
  • $\begingroup$ @LudwigNagasena when people talk about stock by default they mean regular stocks, non-voting stock do exist but people always specify that they are talking about non-voting stock when they are talking about them, the same way as there are preferred dividend stocks as well but people always specify that when they talk about such stocks $\endgroup$
    – 1muflon1
    Commented Nov 22, 2022 at 18:39
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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.

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  • $\begingroup$ so the government owning shares is a little bit like the company gets to control its own tax rate. No conflict of interest at all! $\endgroup$ Commented Nov 23, 2022 at 10:06
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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.

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  • $\begingroup$ I will note that the government already has a 100% voice in how the company is run, if it wants to. So I don't think that's a very relevant difference. $\endgroup$ Commented Nov 22, 2022 at 9:13
  • $\begingroup$ @user253751 That's one reason why the comparison gets complicated. In a mostly-capitalist country, the government doesn't normally control the day to day operation of every business. But yeah, it could if it wanted to. Maybe there are some constitutional limits. But then I suppose by the same token the shareholders don't normally control the day to day operation of a business. So it's just ... different. $\endgroup$
    – Jay
    Commented Nov 23, 2022 at 1:33
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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).

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