The tax differential theory of dividend policy typically requires that dividend

Question

The tax differential theory of dividend policy typically requires that dividend income be taxed at a higher rate than capital gains income. So if the preferential treatment of capital gains that existed before 2003 is eliminated in a tax reform act. (e.g. 20% tax rate on both dividend income and capital gain. The tax differential theory:

1. is no longer valid

2. still holds, except that dividens are not perferred to capital gains

3. still holds, but its impact on dividend policy is reduced.

4.no supports the MW view of divided irrelevance.

Explanation / Answer

The tax differential theory of dividend policy still holds, but its impact on dividend policy is reduced.

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