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Shall We Tax the Risk Premium?

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Author Info
Dirk Schindler () (Department of Economics, University of Konstanz)
Bodo Hilgers () (Department of Economics, University of Konstanz)

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Abstract

Should the realized risk premium be taxed – or not? In a simple two asset portfolio model we analyze the optimal taxation rule when the economy faces aggregate risk. We show in an appropriate designed tax system, that the risk premium of the risky asset should be fully taxed if the households are risk neutral in public consumption. If they are risk averse in public consumption, too, a positive tax rate below 100 % is optimal. We show further, that an efficient risk allocation between public and private consumption can be achieved without any distortion costs.

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Publisher Info
Paper provided by Center of Finance and Econometrics, University of Konstanz in its series CoFE Discussion Paper with number 02-17.

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Length: 19 pages
Date of creation: 10 Oct 2002
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Handle: RePEc:knz:cofedp:0217

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Related research
Keywords: Risk-Taking; Risk Premium; Optimal Taxation; Aggregate Risk;

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Find related papers by JEL classification:
H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
D10 - Microeconomics - - Household Behavior - - - General

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  2. Jack M. Mintz, 2000. "Taxation of Investment and Finance in an International Setting: Implications for Tax Competition," CoFE Discussion Paper 00-33, Center of Finance and Econometrics, University of Konstanz. [Downloadable!]
  3. Alan A. Auerbach & David F. Bradford, 2001. "Generalized Cash Flow Taxation," NBER Working Papers 8122, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  4. Alan J. Auerbach, 1991. "Retrospective Capital Gains Taxation," NBER Working Papers 2792, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  5. Vidar Christiansen, 1993. "A Normative Analysis of Capital Income Taxes in the Presence of Aggregate Risk," The Geneva Risk and Insurance Review, Palgrave Macmillan Journals, vol. 18(1), pages 55-76, June. [Downloadable!] (restricted)
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  7. Konrad, K.A., 1991. "Risk Taking And Taxation In Complete Capital Markets," Papers 90-91-20, California Irvine - School of Social Sciences.
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  8. Alan J. Auerbach, 1992. "On the Design and Reform of Capital Gains Taxation," NBER Working Papers 3967, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  9. Sandmo, Agnar, 1985. "The effects of taxation on savings and risk taking," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 1, chapter 5, pages 265-311 Elsevier. [Downloadable!] (restricted)
  10. Stiglitz, Joseph E., 1983. "Some aspects of the taxation of capital gains," Journal of Public Economics, Elsevier, vol. 21(2), pages 257-294, July. [Downloadable!] (restricted)
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  11. Joseph E. Stiglitz, 1968. "The Effects of Income, Wealth, and Capital Gains Taxation on Risk Taking," Cowles Foundation Discussion Papers 248, Cowles Foundation, Yale University. [Downloadable!]
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  12. Julian Alworth, 1998. "Taxation and Integrated Financial Markets: The Challenges of Derivatives and Other Financial Innovations," International Tax and Public Finance, Springer, vol. 5(4), pages 507-534, October. [Downloadable!] (restricted)
  13. Feldstein, Martin & Yitzhaki, Shlomo, 1978. "The effects of the capital gains tax on the selling and switching of common stock," Journal of Public Economics, Elsevier, vol. 9(1), pages 17-36, February. [Downloadable!] (restricted)
  14. Zodrow, George R., 1995. "Taxation, uncertainty and the choice of a consumption tax base," Journal of Public Economics, Elsevier, vol. 58(2), pages 257-265, October. [Downloadable!] (restricted)
  15. Dreze, Jacques H. & Modigliani, Franco, 1972. "Consumption decisions under uncertainty," Journal of Economic Theory, Elsevier, vol. 5(3), pages 308-335, December. [Downloadable!] (restricted)
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