Dividends and taxes

We present sufficient conditions for taxable investors to be indifferent to dividends despite tax differentials in favor of capital gains (Strong Invariance Proposition). The conditions include two ‘seemingly unrelated’ provisions of the Internal Revenue Code: (1) the limitation of interest deductio...

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Bibliographic Details
Published in:Journal of financial economics 1978-12, Vol.6 (4), p.333-364
Main Authors: Miller, Merton H., Scholes, Myron S.
Format: Article
Language:English
Subjects:
Borrowing
Capital gains
Corporate
Corporate income tax
Deferred income taxes
Dividends
Estate taxes
Income taxes
Insurance
Insurance policies
Internal Revenue Code
Investments
Pension plans
Tax deductions
Tax free
Tax reform
Tax Reform Act 1976-US
Tax returns
Taxable income
Taxation
Tradeoffs
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Summary:We present sufficient conditions for taxable investors to be indifferent to dividends despite tax differentials in favor of capital gains (Strong Invariance Proposition). The conditions include two ‘seemingly unrelated’ provisions of the Internal Revenue Code: (1) the limitation of interest deductions to investment income received and (2) the tax-free accumulation of wealth at the before-tax interest rate on investments in life insurance. Although we use insurance for simplicity in the proof, many tax-equivalent investment vehicles now exist, notably pension funds. Our analysis suggests that the personal income tax is approaching a consumption tax with further drift likely.
ISSN:0304-405X
1879-2774
DOI:10.1016/0304-405X(78)90009-0