Listen to any recent presidential debate, and you’ll hear candidates emphatically backing plans that alternately promise to lower or raise the share that corporations turn over to the government each year in taxes. The argument on one side is that hiking corporate income taxes will harm businesses and their workers, hampering hiring, innovation, and growth. On the other side, proponents of tax increases argue that large, rich corporations should pay their fair share, especially as average Americans struggle to make ends meet and many companies manage to lower their actual tax rates by exploiting loopholes in the tax code.
But corporate tax rates aren’t just policy points or a means of forcing firms to contribute to the larger public pot—they’re also a way, according to a new paper, for the government to stoke or curb companies’ appetite for risk-taking.
For most companies, some level of risk is necessary for growth, innovation, progress, and profits. While in general more risk can result in a more significant financial payoff, what’s considered the appropriate amount of risk can vary from industry to industry and company to company. For instance, pharmaceutical companies might take on additional risks by funneling more research funds into finding a lucrative treatment for a rare illness. Or a technology firm can take on additional risk by branching out into a new domain, such as driverless cars or virtual reality. But excessive risk-taking can not only cripple a company, but an entire economy, as the most recent recession proves: When banks became overburdened with risky, subprime debt, they threatened to bring down not only themselves, but the industry and large swaths of the economy as well.