Suppose that the government raises short- and long-term capital gains tax while leaving all other tax unchanged. This tax rate change would encourage companies to increase the use of share buy-backs rather than issuing dividends.

Question

Quizplus · Accepted Answer

Higher capital gains taxes make share buy-backs less attractive compared to dividends, as investors would prefer to receive income taxed at a lower rate.

Suppose That the Government Raises Short- and Long-Term Capital Gains