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Taxation and Household Portfolio Composition: U.S. Evidence from the 1980s and 1990s

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  • James M. Poterba
  • Andrew Samwick

Abstract

This paper explores the relationship between household marginal income tax rates, the set of assets that households own, and the portfolio shares accounted for by each of these assets. It analyzes data from the 1983, 1989, 1992, and 1995 Surveys of Consumer Finances and develops a new algorithm for imputing federal marginal tax rates to households in these surveys. The empirical findings suggest that a household's marginal tax rate has an important effect its asset allocation decisions. The probability that a household owns tax-advantaged assets is strongly related to its tax rate on ordinary income. In addition, the amount of investment through tax-deferred accounts such as 401(k) plans and IRAs is an increasing function of the household's marginal tax rate. Holdings of corporate stock, which is taxed less heavily than interest bearing assets, and of tax-exempt bonds are also increasing in the household's marginal tax rate. Holdings of heavily taxed assets, such as corporate bonds and interest-bearing accounts, decline as a share of wealth as a household's marginal tax rate increases.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7392.

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Date of creation: Oct 1999
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Publication status: published as Poterba, James M. and Andrew A. Samwick. "Taxation And Household Portfolio Composition: US Evidence From The 1980s And 1990s," Journal of Public Economics, 2003, v87(1,Jan), 5-38.
Handle: RePEc:nbr:nberwo:7392

Note: AG AP PE
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  1. Miller, Merton H, 1977. "Debt and Taxes," Journal of Finance, American Finance Association, American Finance Association, vol. 32(2), pages 261-75, May.
  2. James M. Poterba, 2001. "Taxation, Risk-Taking, and Household Portfolio Behavior," NBER Working Papers 8340, National Bureau of Economic Research, Inc.
  3. Auerbach, Alan J & King, Mervyn A, 1983. "Taxation, Portfolio Choice, and Debt-Equity Ratios: A General Equilibrium Model," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 98(4), pages 587-609, November.
  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. Slemrod,Joel, 1997. "Tax Progressivity and Income Inequality," Cambridge Books, Cambridge University Press, Cambridge University Press, number 9780521587761.
  6. McDonald, Robert L., 1983. "Government debt and private leverage : An extension of the Miller theorem," Journal of Public Economics, Elsevier, Elsevier, vol. 22(3), pages 303-325, December.
  7. Joel M. Dickson & John B. Shoven, 1995. "Taxation and Mutual Funds: An Investor Perspective," NBER Chapters, in: Tax Policy and the Economy, Volume 9, pages 151-180 National Bureau of Economic Research, Inc.
  8. Daniel R. Feenberg & James M. Poterba, 1991. "Which Households Own Municipal Bonds? Evidence From Tax Returns," NBER Working Papers 3900, National Bureau of Economic Research, Inc.
  9. Robert B. Avery & Gregory E. Elliehausen & Glenn B. Canner & Thomas A. Gustafson, 1984. "Survey of consumer finances, 1983: a second report," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), Board of Governors of the Federal Reserve System (U.S.), issue Dec, pages 857-868.
  10. James M. Poterba & Steven F. Venti & David A. Wise, 1999. "Implications of Rising Personal Retirement Saving," NBER Working Papers 6295, National Bureau of Economic Research, Inc.
  11. James M. Poterba & David A. Wise, 1998. "Individual Financial Decisions in Retirement Saving Plans and the Provision of Resources for Retirement," NBER Chapters, in: Privatizing Social Security, pages 363-401 National Bureau of Economic Research, Inc.
  12. James M. Poterba & Andrew A. Samwick, 1997. "Household Portfolio Allocation Over the Life Cycle," NBER Working Papers 6185, National Bureau of Economic Research, Inc.
  13. Feldstein, Martin S, 1976. "Personal Taxation and Portfolio Composition: An Econometric Analysis," Econometrica, Econometric Society, Econometric Society, vol. 44(4), pages 631-50, July.
  14. Bergstresser, Daniel & Poterba, James, 2002. "Do after-tax returns affect mutual fund inflows?," Journal of Financial Economics, Elsevier, Elsevier, vol. 63(3), pages 381-414, March.
  15. Leape, Jonathan I., 1987. "Taxes and transaction costs in asset market equilibrium," Journal of Public Economics, Elsevier, Elsevier, vol. 33(1), pages 1-20, June.
  16. King, Mervyn A. & Leape, Jonathan I., 1998. "Wealth and portfolio composition: Theory and evidence," Journal of Public Economics, Elsevier, Elsevier, vol. 69(2), pages 155-193, June.
  17. Robert B. Avery & Gregory E. Elliehausen & Glenn B. Canner & Thomas A. Gustafson, 1984. "Survey of consumer finances, 1983," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), Board of Governors of the Federal Reserve System (U.S.), issue Sep, pages 679-692.
  18. John B. Shoven, 1999. "The Location and Allocation of Assets in Pension and Conventional Savings Accounts," NBER Working Papers 7007, National Bureau of Economic Research, Inc.
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  20. Agell, Jonas & Edin, Per-Anders, 1990. " Marginal Taxes and the Asset Portfolios of Swedish Households," Scandinavian Journal of Economics, Wiley Blackwell, Wiley Blackwell, vol. 92(1), pages 47-64.
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