Dividends and Taxes

36 Pages Posted: 16 Jun 2006 Last revised: 4 Aug 2010

See all articles by Roger H. Gordon

Roger H. Gordon

University of California, San Diego (UCSD) - Department of Economics; Harvard University - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Martin D. Dietz

University of St. Gallen - Institute of Public Finance and Fiscal Law

Date Written: June 2006

Abstract

How do dividend taxes affect firm behavior and what are their distributional and efficiency effects? To answer these questions, the first problem is coming up with an explanation for why firms pay dividends, in spite of their tax penalty.This paper surveys three different models for why firms pay dividends, and then uses each model to examine the behavioral and efficiency effects of dividend taxes. The three models examined are: the %u201Cnew view,%u201D an agency cost explanation, and a signaling model.While all three models forecast dividends, their forecasts regarding other firm behavior, and their forecasts for the efficiency and distributional effects of a dividend tax, often differ. Given the evidence to date, we find the agency model is the one most consistent with the data.

Suggested Citation

Gordon, Roger H. and Dietz, Martin D., Dividends and Taxes (June 2006). NBER Working Paper No. w12292. Available at SSRN: https://ssrn.com/abstract=908531

Roger H. Gordon (Contact Author)

University of California, San Diego (UCSD) - Department of Economics ( email )

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Harvard University - Department of Economics ( email )

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Centre for Economic Policy Research (CEPR)

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National Bureau of Economic Research (NBER)

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Martin D. Dietz

University of St. Gallen - Institute of Public Finance and Fiscal Law ( email )

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St. Gallen, CH-9000
Switzerland
+41 71 224 3086 (Phone)
+41 71 224 2670 (Fax)

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