Modigliani and Miller knew perfectly well that they were assuming a world that did not exist. Taxation was the most obvious difference between their assumed world and empirical reality. American corporations were (and are) allowed to set interest payments on their bonds and other debts against their tax liabilities, but cannot do so for dividends on their stock. Until 2003, almost all individual investors in the United States faced a higher rate of tax on dividend income than on capital gains, and they can postpone the tax on capital gains until they actually sell their stock, so they may have good reasons to receive the benefits of a firm's earnings as capital gains rather than as dividends.

Donald MacKenzie, An Engine, Not a Camera, loc. 185