What happens to free cash flow when tax rates increase?

When tax rates increase, free cash flow typically decreases. Free cash flow is calculated after accounting for all operating expenses and taxes. An increase in tax rates means a company will have a higher tax liability, which reduces the amount of cash available for distribution or reinvestment after taxes are paid. Essentially, a larger portion of the company's earnings will be paid out in taxes, resulting in less cash being left over, which directly impacts free cash flow negatively.

This relationship between increased tax rates and decreasing free cash flow is important for financial analysis, as it influences investment decisions and valuations. Companies must manage their operations and financial planning around expected tax rates to optimize their cash flows.