Is corporate payout taxation a long run phenomenon? Evidence from international data

• Dividend payouts and share repurchases are cointegrated with dividend tax penalty.
• Dividend payouts are negatively related to dividend tax penalty in the long run.
• Dividend tax appears more influential than capital gains tax on dividend payouts.
• Taxation affects dividends more significantly in countries with high investor protection.

This paper examines whether dividend and capital gains taxation influences corporate payout policy using the country level data of 21 countries in panel versions of time series models. We find that dividend relative to capital gains tax penalty is cointegrated with corporate payouts (dividends and share repurchases) i.e. corporate payout taxation may be a long run phenomenon. Further, the cointegrating vector estimates are largely consistent with the traditional view of dividend taxation whereby the tax penalty discourages dividends, while the estimates give limited support to the premise that firms substitute dividends for share repurchases in response to an increase in dividend tax penalty. Long run causality also operates between the tax penalty and payouts in the error correction models. Additionally, dividend tax appears to be more influential than capital gains tax on dividend payout decisions. Lastly, taxation affects dividends more significantly in countries with high investor protection.