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Stochastic taxation and asset pricing in dynamic general equilibrium

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  • Sialm, Clemens

Abstract

Tax rates have fluctuated considerably since federal income taxes were introduced in the United States in 1913. This paper analyzes the effects of stochastic taxation on asset prices in a dynamic general equilibrium model. Stochastic taxation affects the after-tax returns of both risky and safe assets. Whenever taxes change, bond and equity prices adjust to clear the asset markets. These price adjustments affect assets with long durations, such as equities and long-term bonds, more than short-term assets. Under plausible conditions, investors require higher term and equity premia as compensation for the risk introduced by tax changes.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 30 (2006)
Issue (Month): 3 (March)
Pages: 511-540

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Handle: RePEc:eee:dyncon:v:30:y:2006:i:3:p:511-540

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Cited by:
  1. Marekwica, Marcel, 2012. "Optimal tax-timing and asset allocation when tax rebates on capital losses are limited," Journal of Banking & Finance, Elsevier, vol. 36(7), pages 2048-2063.
  2. Lubos Pastor & Pietro Veronesi, 2011. "Political Uncertainty and Risk Premia," Working Papers 2011-007, Becker Friedman Institute for Research In Economics.
  3. Clemens Sialm, 2005. "Tax Changes and Asset Pricing: Time-Series Evidence," NBER Working Papers 11756, National Bureau of Economic Research, Inc.
  4. Kelly, Bryan & Pástor, Luboš & Veronesi, Pietro, 2014. "The Price of Political Uncertainty: Theory and Evidence from the Option Market," CEPR Discussion Papers 9822, C.E.P.R. Discussion Papers.
  5. Rapp, Marc Steffen & Schwetzler, Bernhard, 2008. "Equilibrium security prices with capital income taxes and an exogenous interest rate," CEFS Working Paper Series 2008-08, Center for Entrepreneurial and Financial Studies (CEFS), Technische Universität München.
  6. Challe, E. & Giannitsarou, C., 2011. "Stock Prices and Monetary Policy Shocks: A General Equilibrium Approach," Working papers 330, Banque de France.
  7. Niemann, Rainer, 2006. "The impact of tax uncertainty on irreversible investment," arqus Discussion Papers in Quantitative Tax Research 21, arqus - Arbeitskreis Quantitative Steuerlehre.
  8. Rainer Niemann, 2007. "The Impact of Tax Uncertainty on Irreversible Investment," CESifo Working Paper Series 2075, CESifo Group Munich.

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