Question

If the tax code were to be changed so that individual tax rates for dividends were taxed at a higher rate and long-term capital gains were taxed at a lower rate, shareholders would most likely encourage to limit investments into diversification that would significantly increase share value and, instead, increase dividend rates.

a. True
b. False

Answer 1

The statement is false; if individual tax rates for dividends were increased and long-term capital gains reduced, shareholders would be more inclined to seek strategies that enhance capital gains rather than increasing dividends.

Step-by-step explanation:

If the tax code were to be amended such that individual tax rates for dividends were taxed at a higher rate and long-term capital gains were taxed at a lower rate, it would influence investor behavior regarding their preferences between dividend income and capital appreciation. Historically, as shown in Table 17.2, the total annual rate of return on S&P 500 stocks has comprised both dividends and capital gains. A shift in tax rates would likely incline shareholders to favor strategies that prioritize increased capital gains, which would be more tax-advantageous, as opposed to strong dividend payouts. Therefore, the statement that shareholders would be encouraged to limit investment into diversification that would increase share value is false. Instead, they would likely advocate for strategies that enhance long-term capital gains due to the favorable tax treatment those would receive.