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New evidence on taxes and portfolio choice

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Author Info
Sule Alan () (Institute for Fiscal Studies and University of Cambridge)
Kadir Atalay
Thomas Crossley () (Institute for Fiscal Studies and University of Cambridge)
Sung-Hee Jeon

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Abstract

Identifying the effect of differential taxation on portfolio allocation requires exogenous variation in marginal tax rates. Marginal tax rates vary with income, but income surely affects portfolio choice directly. In systems of individual taxation - like Canada's - couples with the same household income can face different effective tax rates on capital income when labor income is distributed differently within households. Using this source of variation we find statistically significant but economically modest responses to taxation. In a 'placebo' test, using data from the U.S. (which has joint taxation), we find no effect of the intra-household distribution of labor income on portfolios.

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Paper provided by Institute for Fiscal Studies in its series IFS Working Papers with number W09/11.

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Date of creation: Apr 2009
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Handle: RePEc:ifs:ifsewp:09/11

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Related research
Keywords: Household portfolio choice; taxes;

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Find related papers by JEL classification:
G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household

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References listed on IDEAS
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  1. King, Mervyn A. & Leape, Jonathan I., 1998. "Wealth and portfolio composition: Theory and evidence," Journal of Public Economics, Elsevier, vol. 69(2), pages 155-193, June. [Downloadable!] (restricted)
  2. Herbert J. Schuetze, 2006. "Income splitting among the self-employed," Canadian Journal of Economics, Canadian Economics Association, vol. 39(4), pages 1195-1220, November. [Downloadable!] (restricted)
  3. Poterba, James M. & Samwick, Andrew A., 2003. "Taxation and household portfolio composition: US evidence from the 1980s and 1990s," Journal of Public Economics, Elsevier, vol. 87(1), pages 5-38, January. [Downloadable!] (restricted)
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  4. Michael R. Veall, 2001. "Did tax flattening affect RRSP contributions?," Canadian Journal of Economics, Canadian Economics Association, vol. 34(1), pages 120-131, February. [Downloadable!] (restricted)
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  5. Feldstein, Martin S, 1976. "Personal Taxation and Portfolio Composition: An Econometric Analysis," Econometrica, Econometric Society, vol. 44(4), pages 631-50, July. [Downloadable!] (restricted)
  6. Kevin Milligan, 2002. "Tax-preferred savings accounts and marginal tax rates: evidence on RRSP participation," Canadian Journal of Economics, Canadian Economics Association, vol. 35(3), pages 436-456, August. [Downloadable!] (restricted)
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  7. Rosen, H.S.Harvey S. & Wu, Stephen, 2004. "Portfolio choice and health status," Journal of Financial Economics, Elsevier, vol. 72(3), pages 457-484, June. [Downloadable!] (restricted)
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  8. Slemrod, Joel & Yitzhaki, Shlomo, 2002. "Tax avoidance, evasion, and administration," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 3, chapter 22, pages 1423-1470 Elsevier. [Downloadable!] (restricted)
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  9. Stephens, Melvin Jr & Ward-Batts, Jennifer, 2004. "The impact of separate taxation on the intra-household allocation of assets: evidence from the UK," Journal of Public Economics, Elsevier, vol. 88(9-10), pages 1989-2007, August. [Downloadable!] (restricted)
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