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Taxation of labor income and the demand for risky assets

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  • Douglas W. Elmendorf
  • Miles S. Kimball

Abstract

It is well known that the implicit insurance provided by labor income taxes can reduce total saving. We show that this insurance can change the composition of saving as well, because the reduction in labor-income risk may affect the amount of financial risk that an individual chooses to bear. Given plausible restrictions on preferences, any change in taxes that reduces an individual's labor-income risk and does not make her worse off will lead her to invest more in risky assets. This effect can be quantitatively important for realistic changes in tax rates.

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Bibliographic Info

Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 96-32.

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Date of creation: 1996
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Handle: RePEc:fip:fedgfe:96-32

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Keywords: Saving and investment ; Taxation;

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References

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