Suppose Congress votes to raise the personal tax rate on interest and dividend income. However, it does not change the capital gains tax or the corporate tax rates. This will have the effect of:
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A. B. C. D.B
As personal tax rates increase, firms have to modify their reliance on different capital markets so as to minimize the costs imposed on debt and equity investors.
An increase in interest and dividend income makes debt and dividend payouts costlier. On the other hand, since capital gains are not affected, firms will tend to decrease their dividend pay-out ratios and bank on retained earnings to finance their capital requirements.