9. Prior to 1986, federal tax laws gave preferential treatment to capital gains income relative to...

 

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9. Prior to 1986, federal tax laws gave preferential treatment to capital gains income relative to ordinary income. Under the pre-1986 system, the top federal tax rate on ordinary income (dividends) was 50 percent, and the top federal capital gains tax rate was 20 percent. How- ever, the 1986 tax act drastically changed the tax treatment of capital gains and ordinary income. Under this system, capital gains and ordinary income were no longer given differen- tial treatment, and the top federal tax rate on both types of income was 28 percent. In 1990, tax laws were again changed, and now capital gains are taxed at a top rate of 28 percent while dividends (ordinary income) are taxed at a 31 percent top rate. Finally, the latest Clin- ton administration tax proposal has the dividend rate going up to almost 40 percent, while the capital gains tax rate is capped at 28 percent. How would these different tax structures affect firms such as Bessemer Steel Products when making dividend policy decisions? 9. Prior to 1986, federal tax laws gave preferential treatment to capital gains income relative to ordinary income. Under the pre-1986 system, the top federal tax rate on ordinary income (dividends) was 50 percent, and the top federal capital gains tax rate was 20 percent. How- ever, the 1986 tax act drastically changed the tax treatment of capital gains and ordinary income. Under this system, capital gains and ordinary income were no longer given differen- tial treatment, and the top federal tax rate on both types of income was 28 percent. In 1990, tax laws were again changed, and now capital gains are taxed at a top rate of 28 percent while dividends (ordinary income) are taxed at a 31 percent top rate. Finally, the latest Clin- ton administration tax proposal has the dividend rate going up to almost 40 percent, while the capital gains tax rate is capped at 28 percent. How would these different tax structures affect firms such as Bessemer Steel Products when making dividend policy decisions?

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