Marginal Stockholder Tax Rates and the Clientele Effect

TLDR

Marginal stockholder tax brackets are a key, yet unresolved, factor in stock valuation, investment, dividend, and capital allocation models. The study introduces and tests a method for determining marginal stockholder tax brackets and examines its implications for corporate investment and dividend policy and for assumptions of market rationality. The authors first justify the study, then derive marginal tax brackets from ex‑dividend stock behavior, compute them, and analyze their effects on capital theory.

Abstract

T HE determination of marginal stockholder tax brackets is an important and unresolved issue in the economic literature. Marginal stockholder tax brackets play an important role in stock valuation models [ 1, 6, 14], in normative investment and dividend policy models [11, 16], and in descriptive capital allocation models [ 7, 8, 10, 12 ]. The purpose of this paper is to present and test a method of determining marginal stockholder tax brackets and to explore the implications of our findings for corporate investment policy, corporate dividend policy, and the assumption of market rationality. In the first section of this paper we expand upon the reasons for studying marginal stockholder tax brackets. In the next section we show how marginal stockholder tax brackets can be inferred from the ex-dividend behavior of common stock. In the third and fourth sections we compute marginal stockholder tax brackets and discuss their implications for capital theory.