Do dividend tax cuts lead firms to

Do dividend tax cuts lead firms to increase dividends: Evidence from China
1. Introduction

Dividend taxation is an important component of investors’ taxes and has attracted the attention of policymakers and financial economists. Recently, many countries have begun to focus on capital market taxation reforms. In China, the State Council promulgated ‘Some Opinions of the State Council on Promoting the Reform, Opening and Steady Growth of Capital Markets’ (hereinafter referred to as the ‘Nine Opinions’) in 2004, which stressed that tax policy in relation to capital markets should be refined to encourage public invest-ment. On 13 June, 2005, the Ministry of Finance and the State Administration of Taxation issued the document, ‘Notice on Policies Relating to Individual Income Tax on Dividends and Bonuses’, which stated that taxes on individual investors’ income from dividends and bonuses of listed companies should be levied in accordance with the current tax laws after temporarily deducting 50% of an individual’s taxable income. Therefore, since 13 June, 2005, individual investors’ dividend income has been taxed at a rate of 10%, rather than 20%. The objectives of the dividend tax cut were to increase the likelihood of compa-nies making dividend payments, ease the conflict of interest between large and minority shareholders, protect the interests of minority shareholders and encourage public invest-ment. As a result, this paper examines whether the lower dividend tax rate has led firms to increase their dividend payments.

There has been fierce theoretical debate over whether a reduction in the dividend tax rate would lead firms to increase their dividend payments. The main dispute is between the ‘new theory’ or ‘tax capitalization view,’ and the ‘traditional view’ of whether reduc-tions in dividend tax rates affect the financial behavior of companies. Proponents of the ‘traditional view’ stress that if a company mainly relies on external equity financing then, under classical taxation, higher dividend taxation will tend to raise the cost of capital. As the capital gains tax rates on retained earnings are generally lower than dividend tax rates, shareholders may benefit from decreased dividend payments. Conversely, a decrease in dividend tax can limit the ability of firms to engage in inter-temporal tax arbitrage and may, therefore, lead companies to increase their dividend payments. The ‘new theory’ developed by King (1977) argues that in cases where companies mainly rely on retained earnings, mature companies are able to keep all of their profits to meet their equity financ-ing needs and then distribute the remaining profits as dividends, even when there is dou-ble taxation. Dividend taxes will thus be irrelevant to the companies’ dividend policies. In this case, a decline in dividend tax may not affect a company’s financial behavior and, thus, its dividend payout.

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Do dividend tax cuts lead firms to increase dividends: Evidence from China1. IntroductionDividend taxation is an important component of investors’ taxes and has attracted the attention of policymakers and financial economists. Recently, many countries have begun to focus on capital market taxation reforms. In China, the State Council promulgated ‘Some Opinions of the State Council on Promoting the Reform, Opening and Steady Growth of Capital Markets’ (hereinafter referred to as the ‘Nine Opinions’) in 2004, which stressed that tax policy in relation to capital markets should be refined to encourage public invest-ment. On 13 June, 2005, the Ministry of Finance and the State Administration of Taxation issued the document, ‘Notice on Policies Relating to Individual Income Tax on Dividends and Bonuses’, which stated that taxes on individual investors’ income from dividends and bonuses of listed companies should be levied in accordance with the current tax laws after temporarily deducting 50% of an individual’s taxable income. Therefore, since 13 June, 2005, individual investors’ dividend income has been taxed at a rate of 10%, rather than 20%. The objectives of the dividend tax cut were to increase the likelihood of compa-nies making dividend payments, ease the conflict of interest between large and minority shareholders, protect the interests of minority shareholders and encourage public invest-ment. As a result, this paper examines whether the lower dividend tax rate has led firms to increase their dividend payments.Ada perdebatan sengit teoritis atas Apakah pengurangan tarif pajak dividen akan menyebabkan perusahaan untuk meningkatkan pembayaran dividen mereka. Pertikaian yang utama adalah antara 'teori' atau 'pajak kapitalisasi Lihat', dan 'pandangan tradisional' Apakah reduc-tions di dividen pajak TARIF mempengaruhi perilaku keuangan perusahaan. Pendukung 'pandangan tradisional' menekankan bahwa jika perusahaan terutama bergantung pada pembiayaan ekuitas eksternal kemudian, di bawah klasik pajak, pajak dividen yang lebih akan cenderung untuk meningkatkan biaya modal. Tarif pajak capital gain pada saldo laba umumnya lebih rendah dari tarif pajak dividen, pemegang saham mungkin manfaat dari pembayaran dividen penurunan. Sebaliknya, penurunan pajak dividen dapat membatasi kemampuan perusahaan untuk terlibat dalam arbitrase antar fosil pajak dan oleh karena itu, mungkin, menyebabkan perusahaan untuk meningkatkan pembayaran dividen mereka. 'Teori baru' dikembangkan oleh raja (1977) berpendapat bahwa dalam kasus dimana perusahaan terutama mengandalkan Saldo laba, matang perusahaan mampu menyimpan semua keuntungan mereka untuk memenuhi kebutuhan financ-ing ekuitas dan kemudian mendistribusikan keuntungan tersisa sebagai dividen, bahkan ketika ada dou-ble perpajakan. Pajak dividen sehingga akan relevan untuk perusahaan kebijakan dividen. Dalam kasus ini, penurunan pajak dividen mungkin tidak mempengaruhi perilaku keuangan perusahaan dan, dengan demikian, dengan pembayaran dividen.