Neutrality of a dividend imputation system under the Modigliani-Miller proposition

Watanabe, Taiji (2009) Neutrality of a dividend imputation system under the Modigliani-Miller proposition. Atlantic Economic Journal, 37 (3). pp. 321-322. ISSN 0197-4254


In 'The Cost of Capital, Corporation Finance, and the Theory of Investment' (American Economic Review, June 1958, 48(3), pp. 261–97) and 'Corporate Income Taxes and the Cost of Capital: A Correction' (American Economic Review, June 1963, 58(3), pp. 433–43), Modigliani and Miller (M&M 1958, 1963) demonstrated that the value of a firm consists of the present value of uncertain future income and the present value of certain income, and that the tax shield will increase the value of a firm in the presence of tax deductibility of the interest payments on debt. However, often criticized is the double taxation of income received by the stockholders from the firm. In a classical taxation system, the double taxation happens because the income is taxed at a firm’s level first and then at a stockholder’s level when the income is delivered to them. Some countries, such as Australia, Canada, and the UK, have removed the double taxation and adopted a dividend imputation system where the amount of tax charged at the firm’s level will be credited back to the stockholders when they receive cash dividends. The most representative one is the system in
which a firm is taxed at the corporate tax rate and such taxes are notionally pooled as franking credits. When cash dividends are paid, an amount equal to the cash dividends times the corporate tax rate will be given back to the stockholders as a tax credit.

Statistics for USQ ePrint 6034
Statistics for this ePrint Item
Item Type: Article (Commonwealth Reporting Category C)
Refereed: Yes
Item Status: Live Archive
Additional Information: Copyright International Atlantic Economic Society 2009. Permanent restricted access to published version in accordance with the copyright policy of the publisher.
Faculty / Department / School: Historic - Faculty of Business - School of Accounting, Economics and Finance
Date Deposited: 05 Nov 2009 05:14
Last Modified: 13 Oct 2014 05:57
Uncontrolled Keywords: Modigliani-Miller; dividend imputation system; neutrality
Fields of Research : 14 Economics > 1499 Other Economics > 149999 Economics not elsewhere classified
15 Commerce, Management, Tourism and Services > 1502 Banking, Finance and Investment > 150201 Finance
15 Commerce, Management, Tourism and Services > 1501 Accounting, Auditing and Accountability > 150107 Taxation Accounting
Socio-Economic Objective: E Expanding Knowledge > 97 Expanding Knowledge > 970115 Expanding Knowledge in Commerce, Management, Tourism and Services
Identification Number or DOI: 10.1007/s11293-009-9178-6

Actions (login required)

View Item Archive Repository Staff Only