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The determinants of tax legislation

In a recent study, Bank et al. (2009) consider that if taxation has an influence on dividend policy, it would be interesting to understand the causes of policy taxation. Thus, by taking the

example of the United Kingdom, they distinguish several fiscal periods (1949-1951; 1952- 1958; 1958-1964; 1965-1973; 1973-1997; 1997-2004). These periods are the consequences of political choices. Thus, social democrat governments (left) prefer to give advantages to employees (who are reluctant to receive dividend payments because they consider them a disadvantage -weaker wages for example-) whereas the conservative governments (right) prefer to give advantages to investors. If the authors find a correlation between the fiscal policy and the political choices of governments, they remain nevertheless careful because they were not able to assess a clear relationship between them. In fact under right leaning governments, we should see more dividend payments than under left leaning governments.

In a recent study, Brav et al. (2005) point out, through interviews with professionals, that if the taxation is a means of understanding dividend policy, it remains a second-order cause due to tax legislation. This result is consistent with the study of Allen and Michaely (2003). For these authors, the recent increase in dividend payments since the beginning of 2000 cannot be solely explained by tax systems for two main reasons. First, Brav et al. (2005) highlight a rise of dividends before the change of tax legislation. Second, they notice that a large number of companies pay dividends to shareholders for whom taxation is not an issue. For these authors, the main reasons for dividend payments are twofold: high income growth (which is consistent with Lintner’s analysis, 1956) and investors’ demand.

Finally, the explanations based on clientele effect and tax effect do not seem to be able to fully explain dividend payments. These are the reasons why some authors sought other explanations starting from the theories related to informational asymmetry. This is the next point of this paper (C).

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