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Tax Arbitrage and the Existence of Equilibrium Prices for Financial Assets

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Author Info
 Dammon, Robert M
Green, Richard C
Abstract

In a model where both investors and securities are subject to different ial taxation, there may be no set of prices that rule out infinite ga ins to trade, or "tax arbitrage." This paper characterizes the join t restrictions on financial-asset returns and investors' tax schedule s that preclude tax arbitrage in the absence of short-sale constraint s. The authors show that if there exists any configuration of margina l tax rates on investors' tax schedules that rule out infinite gains to trade, then "no-tax-arbitrage" prices will exist. They also show that the existence of "no-tax-arbitrage" prices ensures the existe nce of equilibrium prices. Copyright 1987 by American Finance Association.

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Article provided by American Finance Association in its journal Journal of Finance.

Volume (Year): 42 (1987)
Issue (Month): 5 (December)
Pages: 1143-66
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Handle: RePEc:bla:jfinan:v:42:y:1987:i:5:p:1143-66

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  1. Jones, C., 1999. "Miller's Equilibrium and Uncertainty," ANUCBE School of Economics Working Papers 1999-373, Australian National University, College of Business and Economics, School of Economics. [Downloadable!]
  2. Frank Milne & Xing Jin, 2006. "Taxation and Transaction Costs in a General Equilibrium Asset Economy," Working Papers 1111, Queen's University, Department of Economics. [Downloadable!]
  3. Rodolfo Apreda, 2003. "On the Extent of Arbitrage Constraints within Transaction Algebras (A non-standard approach)," CEMA Working Papers: Serie Documentos de Trabajo. 239, Universidad del CEMA. [Downloadable!]
  4. Dirk Schindler, 2002. "Besteuerung des Nichts — Steuerarbitrage und das schwindende Aufkommen bei Kapitaleinkommensteuern," CoFE Discussion Paper 02-16, Center of Finance and Econometrics, University of Konstanz. [Downloadable!]
  5. Bjarne Jensen, 2009. "Valuation before and after tax in the discrete time, finite state no arbitrage model," Annals of Finance, Springer, vol. 5(1), pages 91-123, January. [Downloadable!] (restricted)
  6. Francis A. Longstaff, 2009. "Municipal Debt and Marginal Tax Rates: Is there a Tax Premium in Asset Prices?," NBER Working Papers 14687, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  7. Seth Armitage, 2004. "Returns after personal tax on UK equity and gilts, 1919-1998," European Journal of Finance, Taylor and Francis Journals, vol. 10(1), pages 23-43, February. [Downloadable!] (restricted)
  8. Michael R. Powers & David M. Schizer & Martin Shubik, 2003. "Market Bubbles and Wasteful Avoidance: Tax and Regulatory Constraints on Short Sales," Cowles Foundation Discussion Papers 1413, Cowles Foundation, Yale University. [Downloadable!]
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  9. Andrew Ang & Vineer Bhansali & Yuhang Xing, 2008. "Taxes on Tax-Exempt Bonds," NBER Working Papers 14496, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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