Neutrality of a dividend imputation system under the Modigliani-Miller proposition

Article


Watanabe, Taiji. 2009. "Neutrality of a dividend imputation system under the Modigliani-Miller proposition." Atlantic Economic Journal. 37 (3), pp. 321-322. https://doi.org/10.1007/s11293-009-9178-6
Article Title

Neutrality of a dividend imputation system under the Modigliani-Miller proposition

ERA Journal ID18188
Article CategoryArticle
Authors
AuthorWatanabe, Taiji
Journal TitleAtlantic Economic Journal
Journal Citation37 (3), pp. 321-322
Number of Pages2
Year2009
Place of PublicationNew York, United States
ISSN0197-4254
1573-9678
Digital Object Identifier (DOI)https://doi.org/10.1007/s11293-009-9178-6
Web Address (URL)http://springerlink.metapress.com/content/112055/
Abstract

In 'The Cost of Capital, Corporation Finance, and the Theory of Investment' (American Economic Review, June 1958, 48(3), pp. 261–97) and 'Corporate Income Taxes and the Cost of Capital: A Correction' (American Economic Review, June 1963, 58(3), pp. 433–43), Modigliani and Miller (M&M 1958, 1963) demonstrated that the value of a firm consists of the present value of uncertain future income and the present value of certain income, and that the tax shield will increase the value of a firm in the presence of tax deductibility of the interest payments on debt. However, often criticized is the double taxation of income received by the stockholders from the firm. In a classical taxation system, the double taxation happens because the income is taxed at a firm’s level first and then at a stockholder’s level when the income is delivered to them. Some countries, such as Australia, Canada, and the UK, have removed the double taxation and adopted a dividend imputation system where the amount of tax charged at the firm’s level will be credited back to the stockholders when they receive cash dividends. The most representative one is the system in
which a firm is taxed at the corporate tax rate and such taxes are notionally pooled as franking credits. When cash dividends are paid, an amount equal to the cash dividends times the corporate tax rate will be given back to the stockholders as a tax credit.

KeywordsModigliani-Miller; dividend imputation system; neutrality
ANZSRC Field of Research 2020389999. Other economics not elsewhere classified
350202. Finance
350108. Taxation accounting
Public Notes

Copyright International Atlantic Economic Society 2009.
Permanent restricted access to published version in accordance with the copyright policy of the publisher.

Byline AffiliationsState University of New York, United States
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