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The Corporate Effects of Personal Taxation

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  • Richard H. Fosberg

    (Dept. of Economics,Finance and Global Business,Cotsakos College of Business,William Paterson University,1600 Valley Road,Wayne, NJ 07470)

Abstract

Under fairly general conditions it is shown that changes in personal tax rates on dividend and capital gains income will change a firm’s share price, cost of equity capital and the shape of its cost of equity capital function. A personal tax rate change will also affect a firm’s optimal capital structure and its WACC. In 2003, the personal tax rates of dividend and capital gains income were lowered for many tax payers. The model presented here predicts that the effects of the 2003 tax cuts should include a rise share prices, an increase in the amount of equity capital in firm’s capital structures and a significant increase in the number of firms increasing or initiating dividend payments. Various empirical analyses cited in this study show that all of these things did occur.

Suggested Citation

  • Richard H. Fosberg, 2012. "The Corporate Effects of Personal Taxation," International Journal of Business and Social Research, LAR Center Press, vol. 2(1), pages 1-8, February.
    • Handle: RePEc:lrc:larijb:v:2:y:2012:i:1:p:1-8
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    References listed on IDEAS

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    1. Elton, Edwin J & Gruber, Martin J, 1970. "Marginal Stockholder Tax Rates and the Clientele Effect," The Review of Economics and Statistics, MIT Press, vol. 52(1), pages 68-74, February.
    2. Gene Amromin & Paul Harrison & Steven Sharpe, 2008. "How Did the 2003 Dividend Tax Cut Affect Stock Prices?," Financial Management, Financial Management Association International, vol. 37(4), pages 625-646, December.
    3. Alan J. Auerbach & Kevin A. Hassett, 2006. "Dividend Taxes and Firm Valuation: New Evidence," American Economic Review, American Economic Association, vol. 96(2), pages 119-123, May.
    4. Jeffrey R. Brown & Nellie Liang & Scott Weisbenner, 2007. "Executive Financial Incentives and Payout Policy: Firm Responses to the 2003 Dividend Tax Cut," Journal of Finance, American Finance Association, vol. 62(4), pages 1935-1965, August.
    5. Brandon Julio & David L. Ikenberry, 2004. "Reappearing Dividends," Journal of Applied Corporate Finance, Morgan Stanley, vol. 16(4), pages 89-100.
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