Asset Prices in the Presence of a Tax Authority

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Asset Prices in the Presence of a Tax Authority

Author Info

Marc Rapp (Leipzig Graduate School of Management (HHL))
Bernhard Schwetzler (Leipzig Graduate School of Management (HHL))

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.

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

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Find related papers by JEL classification:
D50 - Microeconomics - - General Equilibrium and Disequilibrium - - - General
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Investment Policy

This paper has been announced in the following NEP Reports:

NEP-ACC-2007-03-24 (Accounting & Auditing)
NEP-ALL-2007-03-24 (All new papers)
NEP-CFN-2007-03-24 (Corporate Finance)
NEP-FMK-2007-03-24 (Financial Markets)
NEP-LAW-2007-03-24 (Law & Economics)

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