Answer to Question #275759 in Economics of Enterprise for umair

Question

How would each of the following changes tend to affect the average dividend payout ratios for corporations, other things held constant? Explain your answers.

a.An increase in the personal income tax rate that is applied to dividends.

b.A rise in interest rates.

c.A decline in corporate investment opportunities.

d.Permission for corporations to deduct dividends for tax purposes as they now can do with interest charges

.e.A change in the tax code so that both realized and unrealized capital gains investors earn in any year are taxed at the same rate as dividends.

Answer 1

a. An increase in the personal income tax rate that is applied to dividends will tend to increase the average dividend payout ratios for corporations.

b. A rise in interest rates tend to increase the average dividend payout ratios for corporations.

c. A decline in corporate investment opportunities tend to increase the average dividend payout ratios for corporations.

d. Permission for corporations to deduct dividends for tax purposes as they now can do with interest charges tend to decrease the average dividend payout ratios for corporations.

e. A change in the tax code so that both realized and unrealized capital gains investors earn in any year are taxed at the same rate as dividends tend to decrease the average dividend payout ratios for corporations.