Thread by @ShipLives

There's a lot of discussion recently about implementing wealth taxes at the state or federal level. Many European countries have wealth taxes already. So what can we learn from them?

A recent study took a look. And...it's interesting. #TaxTwitter #WealthTax 🧵

Note for folks who just want to read the journal article -- it's titled "Individual Wealth Taxes and Corporate Payouts" and you can find it in The Accounting Review here: publications.aaahq.org/accounting-rev…

Or download a (free) pre-pub version here: papers.ssrn.com/sol3/papers.cf…

The research stemmed from the observations that wealth taxes apply to the wealthy and that most CEOs are, in fact, wealthy. So, did wealth taxes affect the way that CEOs (and other top execs) ran their companies?

TL;DR: Yes.

Wealth taxes are levied based on someone's net wealth, which includes things like salary and investments. For corporate execs, much of that wealth is tied up in investments they have in their own companies.

If the stocks go up in value, so does their wealth - and their tax bill.

But execs have to pay their tax bills in cash, not in stock shares. What a conundrum!

One solution? Increase dividend payouts to shareholders. Those payouts give execs the cash they need to pay their tax bills.

So researchers looked to see if this happened. (It did.)

Based on data from 4,381 companies, the researchers found that closely held companies, particularly family firms, are more likely to increase dividends when majority stockholders are facing a sharp increase in wealth taxes.

Know what else they found?

The researchers also found these higher dividend payouts were associated with declines in subsequent investment – and elicited lower stock returns.

So, while the payouts were useful for execs, they weren't necessarily in the best interest of the company (or other shareholders).

Does this mean that wealth taxes are actually bad?
Nope.

Wealth taxes can help to address social inequalities and gaps in government funding. That is a good thing.

So what do these findings mean?

Here are a few things I think....

1) It does mean that wealth taxes are not a simple tool, and the folks writing relevant legislation and regulatory guidance need to be thoughtful in how they approach it.

2) Wealth taxes will require more robust corporate governance from boards. For example, they can't just rubber-stamp increased dividend payouts without assessing the impact of those payouts, such as whether they will affect the company's ability to invest in profitable projects.

3) Wealth taxes may also mean that corporate boards will need to re-examine the compensation packages they give their execs. E.g., shifting some of the compensation from shares to salary may decrease pressure from execs to boost dividend payouts so they can pay their tax bills.

You can find a (relatively) concise overview of the study here, if you're curious -- aaahq.org/portals/0/docu…