Bridge over ocean
1 January 2006 Financial Analysts Journal Volume 62, Issue 1

Fault the Tax Code for Low Dividend Payouts

  1. Murad J. Antia
  2. Richard L. Meyer

Reducing the marginal tax rate on dividend income was not the optimal modification of the tax code. The U.S. corporate tax code continues to favor debt over equity because corporate interest payments are tax deductible whereas dividend payments are not. The recommendation in this article is that dividend payments be deductible at the corporate level and fully taxable to investors at their marginal income tax rates. The benefits should be a decline in debt financing and bankruptcy risk, substantial increases in dividend payouts, fewer stock option grants to managers, a decline in the equity risk premium, and higher stock valuations.

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