EECS 3101 Lecture Notes - Lecture 15: Ordinary Income
28 Jun 2018
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EECS 3101 Lecture 15 Notes
Introduction
U.S. investors
Before 2003, dividend income received by U.S. investors was taxed at ordinary income
tax rates, which could be nearly 40 percent for some taxpayers.
This explains why many U.S. investors placed higher valuations on foreign stocks that
paid low or no dividends (especially investors who were not reliant on the stocks for
periodic income).
The maximum tax on long-term capital gains during this period was 20 percent, a rate
that increased the attractiveness of foreign stocks that paid no dividends but had the
potential to generate large capital gains.
In 2003, however, the maximum tax rate on both dividends and long-term capital gains
was set at 15 percent.
Thereafter, U.S. investors became more willing to consider foreign stocks that paid high
dividends.
Methods Used to Invest Internationally For investors attempting international stock
diversification, five common approaches are available
Direct purchases of foreign stocks
Investment in MNC stocks
American depository receipts (ADRs)
Exchange-traded funds (ETFs)
International mutual funds (IMFs)
Each approach is discussed in turn.
Direct Purchases of Foreign Stocks Foreign stocks can be purchased on foreign stock
exchanges.
Such purchases require the services of brokerage firms that can execute the trades
desired by investors at the foreign stock exchange of concern.
Document Summary
Before 2003, dividend income received by u. s. investors was taxed at ordinary income tax rates, which could be nearly 40 percent for some taxpayers. Direct purchases of foreign stocks foreign stocks can be purchased on foreign stock exchanges. Such purchases require the services of brokerage firms that can execute the trades desired by investors at the foreign stock exchange of concern. However, this approach is inefficient because of market imperfections such as insufficient information, transaction costs, and tax differentials among countries. An alternative method of investing directly in foreign stocks is to purchase stocks of foreign companies that are sold on the local stock exchange. Dividend income received by u. s. investors was taxed at ordinary income tax rates, which could be nearly 40 percent for some taxpayers. This explains why many u. s. investors placed higher valuations on foreign stocks that paid low or no dividends (especially investors who were not reliant on the stocks for periodic income).
