Compare the Classical and Imputation Tax Systems

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The Answer is Under imputation systems,investors who receive taxable dividends get a tax credit for part or all of the taxes paid by the corporation.Countries such as United Kingdom,Spain,Germany and Italy follow this type of tax system.This tax credit at least partly offsets the personal taxes these investors must pay on dividend income.In a classical tax system,dividends are taxed as ordinary income,and capital gains are generally taxed at a lower rate than ordinary income.Shareholders do not receive tax credits implying that the classical tax system effectively double-taxes corporate profits.Since 2003,dividend income has been taxed at 15 per cent in the USA and,from 2008,low-income individuals pay no tax on dividends received.Under the classical system,the cost of funding investments through retained earnings is lower than the cost of funding investment by issuing new equity.As a result,new firms with promising opportunities but insufficient amounts of internally generated cash will find it more expensive to fund their investment needs than more mature firms with less promising opportunities.

Compare the Classical and Imputation Tax Systems

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