How do Dividend- and Capital Gains Taxes affect Firms’ Payout Choice?

Abstract

This study analyzes a firm-level dataset of 243 UK public companies listed on the London Stock Exchange between 2010 and 2025 to investigate the influence of relative tax disadvantages on corporate payout decisions. Using a logit regression, the study examines how taxes affect the likelihood of a dividend distribution or a share repurchase, and if significant macroeconomic events temper this relationship. The findings suggest an association between larger tax penalties and a lower likelihood of dividend payout, though the results should be interpreted with caution given methodological constraints. Considerable variation was revealed when a post-2020 interaction term was included, with the tax penalty relationship appearing to weaken during the period corresponding with the combined economic shocks of Brexit and the COVID-19 pandemic. These results suggest that the relationship between tax penalties and corporate payout policy is context-dependent and economically meaningful, but the nature of several variables and model limitations make it difficult to draw definitive causal conclusions.