Journal of Financial Economics Vol. 5 No. 1 1977
Efficient portfolio choice with differential taxation of dividends and capital gains
Abstract
A simple, necessary and sufficient condition is derived under which portfolios that are mean-variance efficient on a before-tax basis are also efficient on an after-tax basis and vice-versa. Under this condition and the hypothesis that investors demand after-tax efficient portfolios, the ‘no-tax’ form of the Capital Asset Pricing Model provides an accurate description of equilibrium asset returns even though investors in the economy may be subject to a wide variety of tax rates on dividends and capital gains. Evidence reported by Black and Scholes (1974), however, makes the condition for equivalence of before and after-tax efficiency empirically implausible. The paper thus concludes with a characterization of some essential differences between before and after-tax efficient portfolios and of the after-tax efficiency losses associated with before-tax efficient portfolios. The relation of these results to the issue of corporate dividend policy choices is also discussed.
- DOI
- 10.1016/0304-405x(77)90028-9
- Volume
- 5
- Issue
- 1
- Pages
- 25-53
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref