[Diggsey]

> Now imagine that corporate tax rate was 40% instead. It completely changes the decision-making process.

Seems more like a question of degree. Dividends are also taxed as income so ~36% is already paid in tax depoending on the income of the shareholder. Increasing the corporate tax rate to 40% brings the effective tax rate to ~52%.

In my experience there's a more fundamental problem with large companies. In a small company, the best way to succeed as an individual (whatever position you have) is for the company as a whole to succeed. At a very large company, the best way to succeed is to be promoted up the ladder, whatever the cost. This effect is the worst at the levels just below the top: you have everything to lose and nothing to gain by the company being successful. It's far more effective to sabotage your peers and elevate yourself rather than work hard and increase the value of the company by a couple of percentage points.

The thing is, the people that have been there since the beginning still have the mindset of helping the company as a whole succeed, but after enough time and enough people have been rotated out, you're left with people at the top who only care about the politics. To them the company is simply a fixture - it existed before them and will continue to exist regardless of what they do.

[cletus]

You're alluding to the double taxation problem with dividends. This is a problem and has had a bunch of bad solutions (eg the passthrough tax break from 2017) when in fact the solution is incredibly simple.

In Australia, dividends come with what are called "franking credits". Imagine a company has a $1 billion profit and wants to pay that out as a dividend. The corporate tax rate is 30%. $700M is paid to shareholders. It comes wiht $300m (30%) in franking credits.

Let's say you own 1% of this company. When you do your taxes, you've made $10M in gross income (1% of $1B), been paid $7M and have $3M in tax credits. If your tax rate is 40% then you owe $4M on that $10M but you have already effectively paid $3M on that already.

The point is, the net tax rate on your $10M gross payout is still whatever your marginal tax rate is. There is no double taxaation.

That being said, dividends have largely fallen out of favor in favor of share buybacks. Some of those reasons are:

1. It's discretionary. Not every shareholders wants the income. Selling on the open market lets you choose if you want money or not;

2. Share buybacks are capital gains and generally enjoy lower tax rates than income;

3. Reducing the pool of available shares puts upward pressure on the share price; and

4. Double taxation of dividends.

There are some who demonize share buybacks specifically. I'm not one of them. It's simply a vehicle for returning money to shareholders, functionally very similar to dividends. My problem is doing either to the point of destroying the business.