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Capital income taxation and risk taking under prospect theory

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  • Jaroslava Hlouskova

    ()

  • Panagiotis Tsigaris

    ()

Abstract

This research examines capital income taxation for a prospect theory investor under some acceptable in the literature reference levels relative to which are the changes in the level of wealth valued. Depending on the reference level, some results indicate that it is possible for a capital income tax increase not to stimulate risk taking even if the tax code provides attractive full loss offset provisions. However, risk taking can be stimulated when investors compare their reference level with others. Risk taking can increase also if the investor interprets part of the tax as a loss instead as a reduced gain. Then the investor becomes risk seeking and moves away from the discomfort zone of relative losses. This later response to taxation causes private risk taking to increase. Copyright Springer Science+Business Media, LLC 2012

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File URL: http://hdl.handle.net/10.1007/s10797-012-9224-1
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Bibliographic Info

Article provided by Springer in its journal International Tax and Public Finance.

Volume (Year): 19 (2012)
Issue (Month): 4 (August)
Pages: 554-573

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Handle: RePEc:kap:itaxpf:v:19:y:2012:i:4:p:554-573

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Web page: http://www.springerlink.com/link.asp?id=102915

Related research

Keywords: Risk taking; Portfolio choice; Loss aversion; Reference level; Taxation; G11; H2;

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Citations

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Cited by:
  1. Shuangzhe Liu & Tiefeng Ma & Wolfgang Polasek, 2013. "Spatial System Estimators for Panel Models: A Sensitivity and Simulation Study," Working Paper Series 05_13, The Rimini Centre for Economic Analysis.
  2. Hlouskova, Jaroslava & Tsigaris, Panagiotis, 2012. "Capital Income Taxation and Risk Taking under Prospect Theory," Economics Series 283, Institute for Advanced Studies.
  3. Fortin, Ines & Hlouskova, Jaroslava, 2012. "Optimal Asset Allocation under Quadratic Loss Aversion," Economics Series 291, Institute for Advanced Studies.
  4. Hlouskova, Jaroslava & Tsigaris, Panagiotis, 2012. "What Does it Take for a Specific Prospect Theory Type Household to Engage in Risky Investment?," Economics Series 286, Institute for Advanced Studies.

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