Corporate Taxation and Dividend Behaviour: a further Comment.

In this note we try to clarify the nature of the debate on the effect of taxation on dividend behaviour, and present some of the important results. This discussion arose out of the paper by Professor Feldstein [1] which proposed an econometric model of dividend behaviour and described the results of fitting this model to data for the United Kingdom. The United Kingdom provides a good case study for such questions because of the frequency with which not merely the rates of tax but also the tax system itself have been changed. Thus one of the main aims of Professor Feldstein's paper was to measure the elasticity of the payout ratio with respect to a tax discrimination variable which measured the extent to which the tax system discriminated against the distribution of dividends. The current controversy is partly over the size of this elasticity, and partly over whether the model should be extended to include other variables; in particular, whether the threat of takeover influences companies' dividend policies. [ABSTRACT FROM AUTHOR]