US tax law historically favored capital gains over dividend income for investors

Evidence

Modigliani and Miller knew perfectly well that they were assuming a world that did not exist. Taxation was the most obvious difference between their assumed world and empirical reality. American corporations were (and are) allowed to set interest payments on their bonds and other debts against their tax liabilities, but cannot do so for dividends on their stock. Until 2003, almost all individual investors in the United States faced a higher rate of tax on dividend income than on capital gains, and they can postpone the tax on capital gains until they actually sell their stock, so they may have good reasons to receive the benefits of a firm’s earnings as capital gains rather than as dividends. — Donald MacKenzie, An Engine, Not a Camera, 185

Categorization

• XREF: Connects to financialization literature on how tax code shapes corporate financial structure and dividend policy preferences. — connects to: Capital gains income can be taxed at lower rates than wage income.; The tax code taxes investment income at a lower rate than wage income — Dorothy A. Brown, The Whiteness of Wealth: How the Tax…, 435; Preferential capital gains rates were repealed in 1986 and later restored
• QUESTION: Worth chasing: the post-2003 equalization of dividend and capital gains rates — how did corporate behavior change, and did it test or confirm M-M’s framework?

Broader Connections

• Capital gains income can be taxed at lower rates than wage income. #expands (0.95)
• The tax code taxes investment income at a lower rate than wage income #expands (0.90) — Dorothy A. Brown, The Whiteness of Wealth, 435
• Preferential capital gains rates were repealed in 1986 and later restored #qualifies (0.85)