Advanced Search
MyIDEAS: Login to save this paper or follow this series

Asset Prices in the Presence of a Tax Authority

Contents:

Author Info

  • Marc Rapp

    (Leipzig Graduate School of Management (HHL))

  • Bernhard Schwetzler

    (Leipzig Graduate School of Management (HHL))

Registered author(s):

    Abstract

    This paper examines the equilibrium effect of a shift in the capital income tax rate upon state prices, risk-neutral probabilities, and corresponding security prices in a single-period binomial model economy with an exogenous risk-free rate. The policy design under consideration consists of a simple linear tax code that applies the economic rent as a tax base. It is shown that if tax proceeds are transferred to outsiders, a shift in the tax rate affects state prices, risk-neutral probabilities as well as equilibrium security prices. Thereby, the effect for the equilibrium price of a security is sensitive with respect to the correlation between its own payoff and the payoff of the market portfolio. If in contrast tax proceeds are redistributed within the cohort of market participants, risk-neutral probabilities, and security prices are unaffected by a change in the tax rate, although state prices are sensitive with respect to the tax rate.

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
    File URL: http://www.bepress.com/cgi/viewcontent.cgi?article=1167&context=gwp
    Download Restriction: no

    Bibliographic Info

    Paper provided by Berkeley Electronic Press in its series German Working Papers in Law and Economics with number 2006-1-1167.

    as in new window
    Length:
    Date of creation:
    Date of revision:
    Handle: RePEc:bep:dewple:2006-1-1167

    Note: oai:bepress:
    Contact details of provider:
    Web page: http://www.bepress.com/gwp/default/

    Related research

    Keywords: Equilibrium security prices; capital income tax; risk-neutral probability measure;

    Find related papers by JEL classification:

    This paper has been announced in the following NEP Reports:

    References

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
    as in new window
    1. Litzenberger, Robert H. & Ramaswamy, Krishna, 1979. "The effect of personal taxes and dividends on capital asset prices : Theory and empirical evidence," Journal of Financial Economics, Elsevier, vol. 7(2), pages 163-195, June.
    2. Poterba, James M., 2002. "Taxation, risk-taking, and household portfolio behavior," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 3, chapter 17, pages 1109-1171 Elsevier.
    3. Ellen R. McGrattan & Edward C. Prescott, 2004. "Taxes, Regulations, and the Value of U.S. and U.K. Corporations," Levine's Bibliography 122247000000000715, UCLA Department of Economics.
    4. Karen K. Lewis, 1999. "Trying to Explain Home Bias in Equities and Consumption," Journal of Economic Literature, American Economic Association, vol. 37(2), pages 571-608, June.
    5. Stein, Jeremy & Kubik, Jeffrey D. & Hong, Harrison, 2008. "The Only Game in Town: Stock-Price Consequences of Local Bias," Scholarly Articles 3710665, Harvard University Department of Economics.
    6. Isabelle Joumard, 2002. "Tax systems in European Union countries," OECD Economic Studies, OECD Publishing, vol. 2002(1), pages 91-151.
    7. Jeremy I. Bulow & Lawrence H. Summers, 1982. "The Taxation of Risky Assets," NBER Working Papers 0897, National Bureau of Economic Research, Inc.
    8. Mankiw, N.G. & Zeldes, S.P., 1990. "The Consumption Of Stockholders And Non-Stockholders," Weiss Center Working Papers 23-90, Wharton School - Weiss Center for International Financial Research.
    9. Gordon, Roger H, 1985. "Taxation of Corporate Capital Income: Tax Revenues versus Tax Distortions," The Quarterly Journal of Economics, MIT Press, vol. 100(1), pages 1-27, February.
    10. Stiglitz, Joseph E, 1969. "The Effects of Income, Wealth, and Capital Gains Taxation on Risk-Taking," The Quarterly Journal of Economics, MIT Press, vol. 83(2), pages 263-83, May.
    11. Brennan, M. J. & Kraus, Alan, 1978. "Necessary Conditions for Aggregation in Securities Markets," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 13(03), pages 407-418, September.
    12. Litzenberger, Robert H & Ramaswamy, Krishna, 1980. " Dividends, Short Selling Restrictions, Tax-Induced Investor Clienteles and Market Equilibrium," Journal of Finance, American Finance Association, vol. 35(2), pages 469-82, May.
    13. Sandmo, Agnar, 1989. "Differential taxation and the encouragement of risk-taking," Economics Letters, Elsevier, vol. 31(1), pages 55-59.
    14. Paul A. Samuelson, 1964. "Tax Deductibility of Economic Depreciation to Insure Invariant Valuations," Journal of Political Economy, University of Chicago Press, vol. 72, pages 604.
    15. Margit Schratzenstaller, 2003. "Dualisierung von Einkommensteuersystemen: Stand und Perspektiven im internationalen Vergleich," Vierteljahrshefte zur Wirtschaftsforschung / Quarterly Journal of Economic Research, DIW Berlin, German Institute for Economic Research, vol. 72(4), pages 535-550.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as in new window

    Cited by:
    1. Schosser, Josef, 2008. "Bewertung ohne "Kapitalkosten": Ein arbitragetheoretischer Ansatz zu Unternehmenswert, Kapitalstruktur und persönlicher Besteuerung," Passauer Diskussionspapiere, Betriebswirtschaftliche Reihe 13, University of Passau, Faculty of Business and Economics.

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:bep:dewple:2006-1-1167. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christopher F. Baum).

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.