Junior Management Science

Volume 4, Issue 1, Pages 63-80, March 2019
The Tax System and Corporate Payout Policies

Nicholas Herold, WHU – Otto Beisheim School of Management

Abstract
In this thesis, I examine how corporate taxes, dividend taxes, personal income taxes, and consumption taxes affect corporate payout behaviour. Using rich international panel data that consist of 40,609 firms across 115 countries from 1999 to 2013, I run linear regressions of each of the four tax rates on three payout variables which measure frequency and magnitude of regular cash dividends distributed by firms. In my baseline model, I find that the predictions of the new view – one of the two views in neoclassical theory – on short-run payout responses only partially hold true. Inconsistent with initial hypotheses, corporate taxes on average do not impact a firm’s dividend payout behaviour in the short run. Regarding dividend taxes, my results show that the hypothesised dividend tax neutrality only holds true for the relative amount of dividends but not for a firm’s likelihood to distribute, increase, and initiate dividends. Consistent with initial hypotheses, personal income taxes and consumption taxes trigger mostly large payout responses in terms of frequency and magnitude of dividend payouts. In my two model extensions, in which I focus on payout behaviour of cash-rich firms and employ a more flexible definition of the time horizon characterising short-run payout, my findings are again only partially in line with predictions of the new view on short-run payout responses. With these results, this thesis not only analyses well-investigated tax rates – corporate taxes and dividend taxes – for which current literature shows mixed empirical evidence but also examines hitherto scarcely considered tax rates – personal income taxes and consumption taxes – in the neoclassical framework and determines their impact on
corporate payout.

Keywords: corporate payout; corporate tax; dividend tax; personal income tax; consumption tax

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