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New Evidence on Taxes and Portfolio Choice

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Author Info

  • Sule Alan
  • Kadir Atalay
  • Thomas F. Crossley
  • Sung-Hee Jeon

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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Bibliographic Info

Paper provided by McMaster University in its series Social and Economic Dimensions of an Aging Population Research Papers with number 245.

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Length: 46 pages
Date of creation: Mar 2009
Date of revision:
Handle: RePEc:mcm:sedapp:245

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Keywords: Household Portfolio Choice; Tax;

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References

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  1. 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.
  2. Thomas F. Crossley & Sung-Hee Jeon, 2007. "Joint Taxation and the Labour Supply of Married Women: Evidence from the Canadian Tax Reform of 1988," Fiscal Studies, Institute for Fiscal Studies, vol. 28(3), pages 343-365, 09.
  3. Joel Slemrod & Shlomo Yitzhaki, 2000. "Tax Avoidance, Evasion, and Administration," NBER Working Papers 7473, National Bureau of Economic Research, Inc.
  4. Hubbard, Robert Glenn, 1985. "Personal Taxation, Pension Wealth, and Portfolio Composition," The Review of Economics and Statistics, MIT Press, vol. 67(1), pages 53-60, February.
  5. Michael R. Veall, 2001. "Did tax flattening affect RRSP contributions?," Canadian Journal of Economics, Canadian Economics Association, vol. 34(1), pages 120-131, February.
  6. Daniel Bergstresser & James Poterba, 2002. "Asset Allocation and Asset Location: Household Evidence from the Survey of Consumer Finances," NBER Working Papers 9268, National Bureau of Economic Research, Inc.
  7. Feldstein, Martin S, 1976. "Personal Taxation and Portfolio Composition: An Econometric Analysis," Econometrica, Econometric Society, vol. 44(4), pages 631-50, July.
  8. Martin Browning, 1994. "The Saving Behaviour of a Two Person Household," Department of Economics Working Papers 1994-01, McMaster University.
  9. Papke, Leslie E & Wooldridge, Jeffrey M, 1996. "Econometric Methods for Fractional Response Variables with an Application to 401(K) Plan Participation Rates," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 11(6), pages 619-32, Nov.-Dec..
  10. 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.
  11. Browning, Martin, 1995. "Saving and the intra-household distribution of income: an empirical investigation," Ricerche Economiche, Elsevier, vol. 49(3), pages 277-292, September.
  12. 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.
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  14. 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.
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  16. Herbert J. Schuetze, 2006. "Income splitting among the self-employed," Canadian Journal of Economics, Canadian Economics Association, vol. 39(4), pages 1195-1220, November.
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Citations

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Cited by:
  1. Hlouskova, Jaroslava & Tsigaris, Panagiotis, 2012. "Capital Income Taxation and Risk Taking under Prospect Theory," Economics Series 283, Institute for Advanced Studies.
  2. Erik Floor & Arjan Lejour, 2014. "Saving behavior and risk taking: Evidence from the Dutch Tax Reform in 2001," CPB Discussion Paper 273, CPB Netherlands Bureau for Economic Policy Analysis.
  3. Richard Ochmann, 2014. "Differential income taxation and household asset allocation," Applied Economics, Taylor & Francis Journals, vol. 46(8), pages 880-894, March.
  4. Nicolas Sauter & Jan Walliser & Joachim Winter, 2010. "Tax Incentives, Bequest Motives, and the Demand for Life Insurance: Evidence from two Natural Experiments in Germany," CESifo Working Paper Series 3040, CESifo Group Munich.
  5. Sule Alan & Bo E. Honoré & Luojia Hu & Søren Leth-Petersen, 2011. "Estimation of panel data regression models with two-sided censoring or truncation," Working Paper Series WP-2011-08, Federal Reserve Bank of Chicago.
  6. Jeffrey Thompson, 2012. "Raising Revenue from High-Income Households: Should States Continue to Place the Lowest Tax Rates on Those with the Highest Incomes?," Published Studies revenue_peri_march5, Political Economy Research Institute, University of Massachusetts at Amherst.
  7. Richard Ochmann, 2010. "Distributional and Welfare Effects of Germany's Year 2000 Tax Reform," Discussion Papers of DIW Berlin 1083, DIW Berlin, German Institute for Economic Research.

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