Tax Clientele Effects of Dividends Under Intertemporal Consumption Choices

Corporate investors putatively seek high dividends because marginal tax rates on dividends are lower than those on capital gains. However, a lower tax quot;ratequot; does not necessarily mean that a higher dividend is desirable. Taking the intertemporal consumption choices given, corporate investors are expected to prefer quot;time-preference-fitted dividendsquot; if tax rates remain constant over time; otherwise they confront a larger quot;amountquot; of tax obligation. If dividend shortfalls exist, they must realize capital gains and thereby suffer unfavorable tax treatment, whereas excessive payments cause intertemporal double taxation on reinvested dividends. Tax-saving problems should be linked with intertemporal consumption choices