the results.In most of the years in our sample (1973-1996)individuals received more than 50% of the dividends paid out by corporations.Moreover,most of these dividends were received by individuals in high tax brackets (those with annual gross income over $50,000). Peterson,Peterson,and Ang (1985)conducted a study of the tax returns of individuals in 1979.More than $33b of dividends were included in individuals'gross income that year.The total of dividends paid out by corporations in 1979 was $57.7b,so individuals received over two- thirds of that total.The average marginal tax rate on these dividends received by individuals (weighted by dividends received)was 40%. The fact that individuals pay considerable taxes on dividends has been particularly important in the dividend debate,because there appears to be a substantial tax disadvantage to dividends compared to repurchases.Dividends are taxed as ordinary income.Share repurchases are taxed on a capital gains basis.Since the tax rate on capital gains has usually been lower than the tax rate on ordinary income,investors had an advantage if firms repurchased,rather than paid dividends.Even after the 1986 Tax Reform Act(TRA)when the tax rates on ordinary income and capital gains were equal for several years,there was a tax disadvantage to dividends because capital gains were only taxed on realization.In the 2001 tax code,long-term capital gains are lower than ordinary income for most individual investors.For example,an investor in the highest marginal tax bracket pays 39.6%taxes on dividends and only 20%tax on long-term capital gains.Black (1976)calls the fact that corporations pay such large amounts of dividends despite the existence of another,relatively untaxed,payout method,the "dividend puzzle." The fifth observation is that corporations smooth dividends.From Table 1,we can see that during the entire 1972-1998 period,aggregate dividends fell only twice (in 1992 and in 1998),and then only by very small amounts.On the other hand,aggregate earnings fell five 9the results. In most of the years in our sample (1973-1996) individuals received more than 50% of the dividends paid out by corporations. Moreover, most of these dividends were received by individuals in high tax brackets (those with annual gross income over $50,000). Peterson, Peterson, and Ang (1985) conducted a study of the tax returns of individuals in 1979. More than $33b of dividends were included in individuals’ gross income that year. The total of dividends paid out by corporations in 1979 was $57.7b, so individuals received over two￾thirds of that total. The average marginal tax rate on these dividends received by individuals (weighted by dividends received) was 40%. The fact that individuals pay considerable taxes on dividends has been particularly important in the dividend debate, because there appears to be a substantial tax disadvantage to dividends compared to repurchases. Dividends are taxed as ordinary income. Share repurchases are taxed on a capital gains basis. Since the tax rate on capital gains has usually been lower than the tax rate on ordinary income, investors had an advantage if firms repurchased, rather than paid dividends. Even after the 1986 Tax Reform Act (TRA) when the tax rates on ordinary income and capital gains were equal for several years, there was a tax disadvantage to dividends because capital gains were only taxed on realization. In the 2001 tax code, long-term capital gains are lower than ordinary income for most individual investors. For example, an investor in the highest marginal tax bracket pays 39.6% taxes on dividends and only 20% tax on long-term capital gains. Black (1976) calls the fact that corporations pay such large amounts of dividends despite the existence of another, relatively untaxed, payout method, the "dividend puzzle." The fifth observation is that corporations smooth dividends. From Table 1, we can see that during the entire 1972-1998 period, aggregate dividends fell only twice (in 1992 and in 1998), and then only by very small amounts. On the other hand, aggregate earnings fell five 9