Tax clientele effects of dividends under intertemporal consumption choices

Corporate investors putatively seek high dividends because marginal tax rates on dividends are lower than those on capital gains. However, a lower tax “rate” does not necessarily mean that a higher dividend is desirable. Taking the intertemporal consumption choices given, corporate investors are expected to prefer “time-preference-fitted dividends” if tax rates remain constant over time; otherwise they confront a larger “amount” of tax obligation. If dividend shortfalls exist, they must realize capital gains and thereby suffer unfavorable tax treatment, whereas excessive payments cause intertemporal double taxation on reinvested dividends. Tax-saving problems should be linked with intertemporal consumption choices.