ELIMINATION OF THE DOUBLE TAXATION OF DIVIDENDS AND CORPORATE FINANCIAL POLICY

Capital structure and dividend decisions affect the firm's total market value in a complete capital market without bankruptcy costs. Such effects are compared under the present tax system with those effects under the corporate deduction and shareholder credit methods for eliminating the double taxation of dividends. In a complete capital market without bankruptcy costs, different corporate capital structures are Pareto non-comparable. The firm's shareholders usually do not unanimously prefer that the firm increase the amount of debt in its capital structure. A shift of the combined incidence of corporate and individual taxes may make the shareholder worse off if his fractional holdings of stock are less than the aggregate market value. Policy implications arise in cases of corporate taxes and bankruptcy costs in a complete capital market and in cases where the number of future contingencies in the world exceeds the number of linearly independent marketable securities in an incomplete capital market.