Taxing State-Owned Enterprises: Theory, Evidence and Implications for U.S. Policy

Abstract:     
This paper aims to contribute to the understanding of 'state capitalism' by developing a theory for the income taxation of state-owned enterprises (SOEs), and explores the theory’s implications for U.S. policy. SOEs are subject to income taxes in many countries, presenting a puzzle as to why governments would tax SOEs in lieu of simply requiring distributions. Some dismiss SOE taxation as superfluous, while others claim that it is what fairness requires. In contrast, I suggest that divergent interests between SOE managers and shareholders create problems for dividend policy. The usual mitigating solutions in the private firm context may not be available for SOEs, and taxing SOEs becomes an alternative mechanism for forcing distributions. This implies that SOEs may be sensitive to the income tax. I discuss the factors affecting SOE tax-sensitivity using a simple economic model, and present empirical evidence from China for SOE tax sensitivity. Surprisingly, the theory implies that SOEs are often at a comparative disadvantage relative to private parties when investing abroad. Consequently, the U.S. should be less concerned about policy measures encouraging foreign SOE investments than some have claimed.

Number of Pages in PDF File: 36

working papers series