Few issues spark more public debate than large corporations paying little—or sometimes no—federal income tax. Since 2018, the U.S. federal corporate income tax rate has been 21%, its lowest level in decades, down from a peak of 53% in 1969. Yet many companies pay even less because of deductions, credits, and other provisions that reduce their effective tax rate—the share of income they actually pay in tax. According to the Institute on Taxation and Economic Policy, at least 88 profitable corporations paid no federal income tax in 2025. Why do some businesses pay more tax than others, and what explains these differences?
A new study from the McCombs School of Business at The University of Texas at Austin analysed three decades of research on corporate tax avoidance to identify the factors that have the greatest influence on companies’ effective tax rates. The researchers compared 31 commonly cited explanations using more than 8,000 annual observations of publicly traded U.S. companies over two decades. Their findings suggest that low tax rates are driven less by manipulation than by a combination of business decisions, financial circumstances, and tax policy. “There’s all this noise about companies that don’t pay taxes or have very low tax rates, but if you dig in, a lot are driven by pretty benign factors,” says Andrew Belnap, assistant professor of accounting.
The study found that investment choices are the single biggest driver of differences in corporate tax rates, accounting for 34% of the variation in cash taxes paid. Companies investing heavily in research and development often benefit from valuable tax credits. Businesses with substantial intangible assets, such as patents and trademarks, can also lower taxes because these assets are easier to allocate across international borders. In addition, firms that earn income through subsidiaries in lower-tax countries generally face lower overall tax burdens.
Financial pressures also play a major role, explaining 21% of the variation in tax rates. Companies facing cash constraints are more motivated to minimise tax payments because preserving cash is essential to their operations. The researchers also found that many tax differences arise naturally from a company’s operating profile rather than deliberate tax planning. Factors such as profitability, accumulated operating losses, and debt levels all influence the amount of tax a business ultimately pays. Even within a single corporation, different business divisions can face markedly different tax rates because of the nature of their activities.
The study also challenges several common assumptions about corporate tax avoidance. Characteristics that often attract public attention—including CEO compensation, board composition, ownership structure, and company size—were found to explain relatively little of the variation in effective tax rates. One notable exception was the influence of individual executives. The researchers found that managers leave a distinct “tax fingerprint” that often follows them from one company to another, with management-related factors accounting for nearly one-quarter of the variation in corporate tax rates.
The findings offer policymakers a clearer picture of where reforms could have the greatest impact. Rather than relying primarily on increased audits or changes to corporate governance, the researchers suggest focusing on rules governing research and development incentives, intangible assets, and international income reporting. Improving transparency around where companies earn their income could also help strengthen tax policy. As Belnap notes, companies largely respond to the incentives built into the tax system, meaning that reducing tax avoidance ultimately depends on changing those incentives rather than simply increasing enforcement.
More information: Andrew Belnap et al, Explaining Corporate Tax Avoidance, Management Science. DOI: 10.1287/mnsc.2024.04839
Journal information: Management Science Provided by University of Texas at Austin