An analysis of the tax-rate differential between ordinary and capital gains tax-rates and its effect on the structure of corporate payouts.

Abstract

Prior studies mention the difference between ordinary and capital gains tax rates as one possible factor contributing to the growth in share repurchases. However, the relation between the tax-rate differential and buybacks has not previously been examined. This study finds personal income taxes are associated with the corporate payout decision. As the tax-rate differential increases, I find share repurchases become a larger percentage of total corporate payout and that repurchase programs become larger. Conversely, when the tax-rate differential becomes smaller, management increases the dividend payout ratio and decreases the percentage of payout in the form of share repurchases. Therefore, the findings suggest that management considers statutory personal tax-rates when setting corporate payout.