The Corporate Effects of Personal Taxation

Authors

  • Richard H. Fosberg Dept. of Economics, Finance and Global Business Cotsakos College of Business William Paterson University 1600 Valley Road Wayne, NJ 07470

DOI:

https://doi.org/10.18533/ijbsr.v2i1.201

Keywords:

Tax, Dividend, equity capital, weighted average cost of capital (WACC)

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.

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Issue

Vol. 2 No. 1 (2012): February

Section

Article

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