| This study extends existing theory regarding shareholder taxes and prices. Although it is commonly agreed that stock is priced after corporate taxes, the effect of shareholder taxes on price is still unclear. In addition, this study tests the extended theory using a sample of financial institutions that made subchapter S elections. S corporation banks have an unusual equity structure that is especially well-suited to investigate the theories of tax capitalization; part of their retained earnings is subject to shareholder tax and part is not. I estimate an implied shareholder tax rate between 5% and 10%, which is consistent with shareholders incorporating modest levels of capital gains taxes into price. Besides its relevance to our understanding of shareholder taxes and price, the results may shed light on the current policy debate. In an effort to stimulate the economy, the Bush administration proposes to eliminate the tax levied on dividends. As a result, a fierce debate has ensued regarding the potential stock market reaction to the passage of the proposed legislation. Contrary to White House predictions, this study's estimates of tax capitalization suggest that the repeal of the dividend tax will have little impact on security prices. |
