Abstract
On January 1, 2009 the effective tax rate for individual-recipient dividend fell significantly from 35% to 10%. This paper investigated the impact of the dividend tax cut policy on dividend payment in three aspects i.e. extensive margin, intensive margin and dividend per share amount, an adoption from Chetty and Saez (2004) approach. I used publicly available data provided by The Indonesian Stock Exchange and The Indonesian Central Securities Depository. I found that one year after the tax cut policy, the fraction of the firms paying dividend increase and reach its peak in 2011. From intensive margin approach, the percentage of firms that increase their dividend per share amount also increase one year after the policy. Using regression analysis, this paper also found that the tax cut policy increased the dividend per share amount by 35.03. This study, to my knowledge, provides the first empirical evidence of the effect of dividend tax cut policy and concludes that the policy has positive impact on dividend payment in term of fraction of firms paying dividend, fraction of firms increasing their dividend and the nominal amount of the dividend per share.
Highlights
On September 23, 2008, President Susilo Bambang Yudhoyono signed the Law Number 36 Year 2008 concerning The Fourth Amendment of the Law Number 7 Year 1983 about Income Tax
I will discuss about the extensive margin i.e. fraction of dividend payer and initiations/terminations of annual dividend
I will discuss about the intensive margin i.e. increase or decrease in dividend payment
Summary
On September 23, 2008, President Susilo Bambang Yudhoyono signed the Law Number 36 Year 2008 concerning The Fourth Amendment of the Law Number 7 Year 1983 about Income Tax (hereinafter refer to as 2008 Act). One of the significant changes stipulated in the 2008 Act was tax rate reduction for dividend received by individual. Before the enactment of the 2008 Act, the mechanism for taxing dividend received by individual was consisted of two stages: payment stage and yearend calculation stage. Dividend paid by dividend payer was subject to 15% withholding tax rate. In year-end calculation stage, dividend receiver must aggregate the dividend with other income in the calculation of individual taxable income This aggregated taxable income was subject to progressive individual tax rate (maximum rate is 35%) and allowed withholding tax payment as a tax credit. The effective tax rate for dividend received by individual before the enactment of the 2008 Act was 35%
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