Dividends and Tax Policy in the Long Run

59 Pages Posted: 24 Feb 2006

See all articles by Steven A. Bank

Steven A. Bank

University of California, Los Angeles (UCLA) - School of Law

Date Written: 2006


There is a long-standing debate as to whether changes in shareholder-level taxes have an effect on firm dividend policy. The traditional view is that tax changes influence dividends, while the new view is that there generally is no such effect. In support of the traditional view, recent observers point to the rise in dividends following the reduction in the tax rate on dividends in 2003. In fact, the resurgence in dividends has been so strong that President Bush has made it one of his top legislative priorities to permanently extend the tax cut, which is currently set to expire at the end of 2010. The popular assumption is that the rise in dividends - and any associated economic and corporate governance benefits - will only continue if the lower rate is made permanent. This Article challenges that assumption. Using finance theory and empirical evidence from the U.S. and other countries, this Article shows that the relationship between dividends and taxes over the long run is more complex than dividend tax cut proponents suggest. Because the 2003 tax cut was only a temporary cut, making it permanent may actually have an effect that is opposite of what is intended. The implication is not that a temporary tax cut is preferable to a permanent one, but rather that the attempt to influence corporate behavior through the tax laws should be resisted as either futile or potentially counterproductive.

Keywords: Jobs and Growth Tax Relief Reconciliation Act of 2003, shareholder taxes, tax dividends

JEL Classification: G35, H24, K34, K22

Suggested Citation

Bank, Steven A., Dividends and Tax Policy in the Long Run (2006). UCLA School of Law, Law-Econ Research Paper No. 06-06, Available at SSRN: https://ssrn.com/abstract=886583 or http://dx.doi.org/10.2139/ssrn.886583

Steven A. Bank (Contact Author)

University of California, Los Angeles (UCLA) - School of Law ( email )

385 Charles E. Young Dr. East
Room 1242
Los Angeles, CA 90095-1476
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310-794-7601 (Phone)

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