Research Highlights
The figure shows the difference in Dividend Payer% between low tax states and high tax states over the period 1978-2021. The variable Dividend Payer% is the percentage of sample firms that pay dividends to common shareholders in that year. I consider firms as subject to higher taxes if their headquarter state’s tax rate is above the median in that year; otherwise they are subject to lower taxes. I use the state wage income tax rate because, for most states, the wage income tax rate is also the tax rate on household dividend income. The vertical lines are for the years 2003 and 2017, corresponding to the “Jobs and Growth Tax Relief Reconciliation Act” and the “Tax Cuts and Jobs Act”, respectively. The JGTRRA changes taxation such that qualified dividends and long-term capital gains have the same rate. The TCJA places caps on the deductibility of state and local taxes from federal taxable income, thereby increasing households’ sensitivity to state taxation. The dashed lines represent the 95% confidence interval in each year.
State Shareholder Taxation and Corporate Payout Policy
Working Paper (not yet peer-reviewed)
Tarun Patel
(solo-authored)
Main Idea: Households cannot defer their dividend income, but they can defer the realization of capital gains income. Households can relocate to a lower tax state before selling stock, reducing state income tax costs. Therefore, corporate shareholders who are subject to high state taxation may prefer share repurchases to dividends because they can move to avoid state taxes.
Prediction: States with lower income tax rates will have a greater proportion of dividend paying firms when compared to states with higher income tax rates. The difference in these proportion would increase after 2017.
Approach: Corporations headquartered in high tax states probably have disproportionately more shareholders who are subject to high state tax rates (e.g. executives, board members, and employees who co-locate with HQ). The 2017 Tax Cuts and Jobs Act places caps on state and local tax deductibility from federal taxable income, so shareholders’ sensitivity to state income taxes should increase after the change.
(Preliminary) Pictured Result: It does appear that low tax states have a higher proportion of dividend payers, on average, compared to high tax states. After 2017, the difference rapidly jumps to be greater than 5 percentage points, a level unobserved since the late 1970s.
Related Media:
High Tax States and Deductibility Limits (WSJ)
Jeff Bezos Moves to Florida (CNBC)
Americans are Moving (Tax Foundation)
The top figure plots the percentage of announced vs. hypothetical mergers across different ranges of Political Divergence. The bottom figure plots the four-year moving average of Political Divergence for all announced deals vs all hypothetical deals. To create the hypothetical distribution of deals, we create all possible firm pairs, and calculate the average Political Divergence. Political Divergence is defined as the absolute value of the difference between acquirers’ and targets’ Democratic Affiliation.
The Economic Effects of Political Polarization: Evidence from the Real Asset Market
Working Paper (under peer review)
Tarun Patel (with Ran Duchin, Abed El Karim Farroukh, and Jarrad Harford)
Main Idea: Political polarization has risen in the United States. Political science research shows that the rise of political polarization has led to a new type of division in the mass public coined “affective polarization,” whereby Americans increasingly dislike and distrust those from the other party. With rising polarization, people who support opposing political parties might not work well together, affecting the ability of companies to create value in mergers.
Prediction: We hypothesize that the rise in political polarization has made it more difficult for politically divergent firms to merge and integrate.
Approach: We collect data on the political views of corporate employees using two distinct approaches. The first approach matches the internet profiles of corporate employees to state-by-state voter registration records. The second approach relies on the personal contributions of corporate employees to political campaigns. We measure a firm’s political attitudes as the ratio of employees supporting the Democrat party over employees supporting either the Democrat or Republican party, i.e., Democratic Affiliation. We construct a measure of the disparity between firms’ employees’ political support, Political Divergence, which equals the absolute value of the difference between their political attitudes.
Pictured Result: Politically divergent firms are less likely to merge with each other than would be predicted by random matching (top figure). Further, the realized average political divergence of merging companies has decreased substantially as political polarization has risen.
Related Media:
Politics has pulled the country in different directions (Wall Street Journal)
Managing a team with conflicting politics (Harvard Business Review)
Firing for Political Activity (Society for Human Resource Management)