Dividends and Taxes

Evidence on Tax-Reduction Strategies

Abstract

This article investigates two aspects of dividend tax avoidance not addressed by prior research. First, it examines the aggregate dividend tax savings provided to individuals through tax-exempt and tax-deferred accumulators. Using the Internal Revenue Service Individual Income Tax Model, it then proceeds to determine whether specific provisions of the Internal Revenue Code, such as the preferential treatment of capital gains, the investment-interest limitation, and the $100 dividend exclusion, affect the individual’s choice of investment income. Finally, it provides a direct estimate of the average marginal tax rate on dividends that takes into account tax-favored accumulators. Journal of Business, Vol. 63, No. 2 (April 1990), pp. 239-260. (Reprinted with permission of the University of Chicago Press.)