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Capital Income Taxation and Risk-Taking in a Small Open Economy

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Author Info
Patrick K. Asea
Stephen J. Turnovsky

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Abstract

How do capital income taxes affect household portfolio choice and growth? We" approach this question within the context of a stochastic model of a small open economy in" which taxes on income from domestic capital (equity) and foreign bonds affect household" portfolio choice, welfare and the growth rate of the economy. The theoretical and numerical" analysis demonstrates the important role that risk plays in determining the mean and variability" of growth as well as the conditions under which a higher tax rate can be welfare improving. To" shed more light on the complex theoretical interaction between taxes and risk-taking we estimate" a reduced-form multinomial probit model of household portfolio choice using the method of" simulated moments. The empirical evidence is in stark contrast to the conventional wisdom " we find that higher taxes make it less likely that the household will hold risky assets."

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 6189.

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Date of creation: Sep 1997
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Publication status: published as Journal of Public Economics, Vol. 68, no. 1 (April 1998): 55-90.
Handle: RePEc:nbr:nberwo:6189

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Find related papers by JEL classification:
E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy

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  1. McFadden, Daniel, 1989. "A Method of Simulated Moments for Estimation of Discrete Response Models without Numerical Integration," Econometrica, Econometric Society, vol. 57(5), pages 995-1026, September. [Downloadable!] (restricted)
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  2. Vassilis A. Hajivassiliou & Daniel McFadden, 1990. "The Method of Simulated Scores for the Estimation of LDV Models with an Application to External Debt Crisis," Cowles Foundation Discussion Papers 967, Cowles Foundation, Yale University. [Downloadable!]
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  4. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-54, July. [Downloadable!] (restricted)
  5. Turnovsky, Stephen J, 1993. "Macroeconomic Policies, Growth, and Welfare in a Stochastic Economy," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 34(4), pages 953-81, November. [Downloadable!] (restricted)
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  7. Sen, P. & Turnovsky, S.J., 1990. "Investment Tax Credit In An Open Economy," Working Papers 90-09, University of Washington, Department of Economics.
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  8. Rebelo, Sergio, 1991. "Long-Run Policy Analysis and Long-Run Growth," Journal of Political Economy, University of Chicago Press, vol. 99(3), pages 500-521, June. [Downloadable!] (restricted)
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  9. Levine, Ross, 1991. " Stock Markets, Growth, and Tax Policy," Journal of Finance, American Finance Association, vol. 46(4), pages 1445-65, September. [Downloadable!] (restricted)
  10. Agell, Jonas & Edin, Per-Anders, 1990. " Marginal Taxes and the Asset Portfolios of Swedish Households," Scandinavian Journal of Economics, Blackwell Publishing, vol. 92(1), pages 47-64.
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  15. Feldstein, Martin S, 1976. "Personal Taxation and Portfolio Composition: An Econometric Analysis," Econometrica, Econometric Society, vol. 44(4), pages 631-50, July. [Downloadable!] (restricted)
  16. Bovenberg, A. Lans, 1986. "Capital income taxation in growing open economies," Journal of Public Economics, Elsevier, vol. 31(3), pages 347-376, December. [Downloadable!] (restricted)
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  18. Giovannini, Alberto, 1990. "International capital mobility and capital-income taxation : Theory and policy," European Economic Review, Elsevier, vol. 34(2-3), pages 480-488, May. [Downloadable!] (restricted)
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  20. Merton, Robert C, 1969. "Lifetime Portfolio Selection under Uncertainty: The Continuous-Time Case," The Review of Economics and Statistics, MIT Press, vol. 51(3), pages 247-57, August. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Gareth Myles, 2000. "Taxation and economic growth," Fiscal Studies, Institute for Fiscal Studies, vol. 21(1), pages 141-168, March. [Downloadable!]
  2. Aude POMMERET & William T. SMITH, 2004. "Fertility, Volatility, and Growth," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 04.08, Université de Lausanne, Faculté des HEC, DEEP. [Downloadable!]
    Other versions:
  3. Ziegler, Andreas R., 2001. "Simulated z-tests in multinomial probit models," ZEW Discussion Papers 01-53, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research. [Downloadable!]
  4. Ziegler, Andreas, 2002. "Simulated Classical Tests in the Multiperiod Multinomial Probit Model," ZEW Discussion Papers 02-38, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research. [Downloadable!]
  5. Geremia Palomba, 2004. "Capital Income Taxation and Economic Growth in Open Economies," IMF Working Papers 04/91, International Monetary Fund. [Downloadable!]
  6. Stephen Turnovsky & Pradip Chattopadhyay, 1998. "Volatility and Growth in Developing Economies: Some Numerical Results and Empirical Evidence," Discussion Papers in Economics at the University of Washington 0055, Department of Economics at the University of Washington. [Downloadable!]
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  7. Ziegler, Andreas, . "Simulierte klassische Parameterschätzung in Probitmodellen," IVS discussion paper series 578, Institut für Volkswirtschaft und Statistik (IVS), University of Mannheim. [Downloadable!]
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