Question

What are tax clienteles? Give an example. Why might we not observe tax clienteles in practice?

What are tax clienteles? Give an example. Why might we not observe tax clienteles in practice?

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Answer #1

Tax clientele refers to the category of investors who have specific preferences for equity or debt securities due to the differential tax preference on the personal tax rates and tax liabilities. For example: Taxpayer with an explicit tax rate of 30% would be indifferent between a taxable yield for 6% and a taxable yield for 5%. However the clientele effects impede changing dividend policy. Furthermore the brokerage costs and taxes causes a loss to investors who have to switch companies; thus in practice we don't observe tax clientele

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