Are Corporate Tax Reductions Real Benefits Under Imputation Systems?

40 Pages Posted: 18 Jan 2016

See all articles by Chia-Wen Chang

Chia-Wen Chang

Department of Accounting, Ming Chuan University

Ming-Chin Chen

National Chengchi University (NCCU) - Department of Accounting

Vincent Chen

National Chengchi University (NCCU) - Department of Accounting

Date Written: January 17, 2016

Abstract

Imputation systems integrate corporate and shareholder personal income taxes to alleviate double taxation of dividend income. In this study, we empirically examine whether a corporate tax rate reduction under an imputation tax system benefits shareholders. Using Taiwan as a setting, our analyses indicate that decreasing the corporate tax rate is associated with an increase in dividend payout ratio and foreign investment. Moreover, the increase in dividend payout ratio is even greater for firms that have a higher increase in foreign ownership. Additionally, the market reacts positively to an announcement of a tax rate reduction; specifically, positive stock price reactions are stronger for firms that experienced a greater increase in foreign ownership in response to the tax rate reduction, for firms with greater liquidity constraints and more growth opportunities before the tax rate reduction, and for firms with a bigger decrease in effective tax rates after the tax rate reduction. Overall, we provide evidence that a tax rate reduction is associated with economic impacts and that foreign shareholders appear to be the main beneficiaries of a tax rate reduction under an imputation tax system.

Keywords: Imputation Tax Systems, Tax Reduction, Foreign Investment, Corporate Dividend Policy

JEL Classification: H25, K34, M41, M48

Suggested Citation

Chang, Chia-Wen and Chen, Ming-Chin and Chen, Vincent, Are Corporate Tax Reductions Real Benefits Under Imputation Systems? (January 17, 2016). Available at SSRN: https://ssrn.com/abstract=2716942 or http://dx.doi.org/10.2139/ssrn.2716942

Chia-Wen Chang

Department of Accounting, Ming Chuan University ( email )

250 Zhong Shan N. Rd., Sec. 5
Taipei, 111
Taiwan

Ming-Chin Chen (Contact Author)

National Chengchi University (NCCU) - Department of Accounting ( email )

No. 64, Sec 2
Chih-Nan Road
Wenshan, Taipei
Taiwan

Vincent Chen

National Chengchi University (NCCU) - Department of Accounting ( email )

No. 64, Sec 2
Chih-Nan Road
Wenshan, Taipei
Taiwan

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