Consequently dividend payments create a tax

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Unformatted text preview: which has been treated and taxed as capital gains. Consequently, dividend payments create a tax disadvantage for investors and should reduce the returns to stockholders after personal taxes. Stockholders should respond by reducing the stock prices of the firms making these payments, relative to firms that do not pay dividends. In this scenario, firms will be better off either retaining the money they would have paid out as dividends or repurchasing stock. The double taxation of dividends –– once at the corporate level and once at the investor level ––has not been addressed directly in U.S. tax law until very recently2, but it has been dealt with in other countries in a couple of ways. In some countries, like Britain, individual investors are allowed a tax credit for the corporate taxes paid on cash flows paid to them as dividends. In other countries, like Germany, the portion of the earnings paid out as dividends are taxed at a lower rate than the portion reinvested back into the firm. Dividends are good: The Clientele and Signaling Stories Notwithstanding the tax disadvantages, many firms continue to pay dividends and i...
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This note was uploaded on 01/17/2012 for the course ECON 101 taught by Professor Econnorm during the Spring '11 term at Art Institutes Intl. Minnesota.

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