Economics Asked on August 20, 2021
My (limited) understanding is that dividends and share repurchases are economically very similar: while share repurchases are slightly less direct, both transactions are effectively ways for publicly traded companies to transfer wealth to their shareholders.
From what I can tell, the only real difference between these two transactions is the way that the tax code treats them: (non-qualified) dividends are taxed as ordinary income, while the gains resulting from share repurchases are taxed as capital gains. Companies often prefer to make share repurchases because they are effectively taxed at lower rates.
It seems to me that there’s a likely inefficiency whenever effectively equivalent transactions are taxed at different rates. Is there some important difference between dividends and share repurchases that I’m missing that justifies the tax code’s differential treatment?
I am a consultant in Canada, and one of the first things to decide is whether to form a corporation or not. The logic varies upon the tax code in each jurisdiction. The following article discusses the situation in the United States: link to small business advice website.
Answered by Brian Romanchuk on August 20, 2021
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