Few issues in modern economics trigger more outrage than the sight of a profitable corporation reporting little—or even no—federal income tax. The United States imposes a statutory corporate tax rate of 21%, a level that remains among the lowest in decades and far below the 53% top rate recorded in 1969. Yet the amount companies actually pay can be dramatically lower than the headline rate once deductions, credits, losses, depreciation rules and international provisions are taken into account. New research from The University of Texas at Austin suggests that the explanation is less about secretive manipulation than about the economic structure of the companies themselves.
In 2025, at least 88 profitable corporations paid no federal income tax, according to the Institute on Taxation and Economic Policy. Such figures have intensified the debate over whether corporations are exploiting loopholes or simply responding rationally to incentives embedded in the tax code. A study by Andrew Belnap of the McCombs School of Business, Kaitlyn Kroeger of the University of Iowa and Jacob Thornock of Brigham Young University examines that question by comparing 31 frequently cited explanations for corporate tax avoidance. Their findings indicate that what a company invests in, how it earns money and who runs it can matter more than its size or public reputation.
The researchers analyzed more than 8,000 annual observations of publicly traded U.S. corporations over approximately two decades. Rather than looking only at statutory rates, they focused on effective tax rates, which measure taxes paid relative to income after accounting for tax preferences. They also distinguished between accounting tax rates and cash tax rates. A company may record a tax expense in its financial statements while delaying the actual payment, or it may use credits and deductions that reduce the cash sent to the government. That distinction is crucial when comparing businesses with different investment cycles and financial structures.
Investment opportunities emerged as the most powerful broad explanation. The researchers estimate that investment-related characteristics account for about 34% of the differences in companies’ cash tax rates. Research and development is one important example. Governments commonly subsidize innovation through tax credits, allowing companies that spend heavily on laboratories, software development or technical experimentation to reduce their tax bills. These incentives are designed to encourage long-term economic growth, but they can also produce sharp differences between companies that invest in research and those that do not.
Intangible assets create another major divide. Patents, trademarks, proprietary software, brands and other forms of intellectual property can generate enormous income without requiring factories or physical equipment in every country where the business operates. Because ownership and licensing arrangements can often be organized across borders, income connected to intangible assets may be assigned to subsidiaries in jurisdictions with lower tax rates. The researchers identify foreign subsidiaries and international income allocation as significant contributors to lower cash tax rates, although such arrangements are not automatically illegal or abusive.
Financial pressure also plays a substantial role. Companies facing tight access to cash have a strong incentive to reduce the amount they pay in taxes immediately, since every retained dollar can help fund payroll, debt payments, expansion or research. Financial constraints explained approximately 21% of the variation in cash tax rates, according to the study. This does not necessarily mean that financially struggling corporations engage in aggressive schemes. Instead, the tax system gives them powerful reasons to claim available deductions, accelerate eligible expenses and postpone payments whenever the law permits.
A company’s operating profile can be equally important. Net operating losses, for example, may allow a corporation to offset taxable profits in future years after suffering a downturn. Profitability itself affects the rate because companies with volatile earnings may move between taxable and loss-making periods. Debt also changes the calculation: interest payments are generally deductible, so a heavily leveraged company may report lower taxable income than a similar business financed primarily with equity. These features can make effective tax rates look very different even when two companies face the same statutory rate and operate under the same national tax rules.
The study also reveals that tax rates can vary dramatically inside a single corporation. Ford’s automobile manufacturing business, for instance, pays an effective rate of about 25%, while its financial services operation pays roughly 19%. The difference reflects the distinct economics of manufacturing and lending, including capital investment, interest income, credit losses, depreciation and international activity. Looking only at a corporation’s consolidated tax rate can therefore conceal the mechanisms producing it. A low overall rate may result from a particular division, investment strategy or geographic income pattern rather than from a company-wide decision to minimize taxes.
Surprisingly, several factors that attract public attention explained relatively little of the variation. CEO compensation structures, board composition, ownership arrangements and company size were not among the strongest predictors. The identity of the manager, however, did matter. Individual executives appeared to leave a recognizable “tax fingerprint” that followed them as they moved between companies. Manager-specific effects accounted for approximately 24% of tax variation, suggesting that leadership may influence how aggressively a company interprets tax rules, organizes transactions or prioritizes tax planning. The result does not prove that executives personally cause every tax difference, but it indicates that corporate tax behavior is not determined solely by balance sheets and formal policies.
The findings offer policymakers a possible alternative to relying only on broader audits or corporate governance reforms. If lawmakers want to raise tax revenue, the researchers argue, the most effective targets may be the rules governing research incentives, intangible assets and the disclosure of income across countries and business units. Greater transparency could make it easier to determine whether low tax payments reflect legitimate incentives, temporary losses or aggressive profit shifting. The central message is that corporations are responding to the signals built into the tax code. Reducing tax avoidance, the researchers conclude, may require changing those incentives rather than assuming that every unusually low tax bill is evidence of deception.
Subject of Research: Corporate tax avoidance and the factors influencing companies’ effective and cash tax rates.
Article Title: Explaining Corporate Tax Avoidance
Web References: https://www.pgpf.org/article/six-charts-that-show-how-low-corporate-tax-revenues-are-in-the-united-states-right-now/; https://itep.org/88-profitable-corporations-paid-zero-income-tax-in-2025/; https://www.mccombs.utexas.edu/faculty-and-research/faculty-directory/profile/?username=ab56767
References: Belnap, A., Kroeger, K., and Thornock, J., “Explaining Corporate Tax Avoidance,” Management Science, DOI: 10.1287/mnsc.2024.04839.
Keywords: corporate tax avoidance, effective tax rates, cash taxes, corporate income tax, research and development credits, intangible assets, foreign subsidiaries, tax policy, financial constraints, corporate finance, accounting, economics
