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Stochastic Taxation and Asset Pricing in Dynamic General Equilibrium

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  • Clemens Sialm

Abstract

Tax rates have fluctuated considerably since federal income taxes were introduced in the United States in 1913. This paper analyzes the effects of stochastic taxation on asset prices in a dynamic general equilibrium model. Stochastic taxation affects the after-tax returns of both risky and safe assets. Whenever taxes change, bond and equity prices adjust to clear the asset markets. These price adjustments affect assets with long durations, such as equities and long-term bonds, more than short-term assets. Under plausible conditions, investors require higher term and equity premia as compensation for the risk introduced by tax changes.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9301.

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Date of creation: Nov 2002
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Publication status: published as Sialm, Clemens. "Stochastic Taxation And Asset Pricing In Dynamic General Equilibrium," Journal of Economic Dynamics and Control, 2006, v30(3,Mar), 511-540.
Handle: RePEc:nbr:nberwo:9301

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Cited by:
  1. Lubos Pastor & Pietro Veronesi, 2011. "Political Uncertainty and Risk Premia," Working Papers 2011-007, Becker Friedman Institute for Research In Economics.
  2. Edouard Challe & Chryssi Giannitsarou, 2012. "Stock Prices And Monetary Policy Shocks: A General Equilibrium Approach," Working Papers hal-00719956, HAL.
  3. Niemann, Rainer, 2006. "The impact of tax uncertainty on irreversible investment," arqus Discussion Papers in Quantitative Tax Research 21, arqus - Arbeitskreis Quantitative Steuerlehre.
  4. Kelly, Bryan & Pástor, Luboš & Veronesi, Pietro, 2014. "The Price of Political Uncertainty: Theory and Evidence from the Option Market," CEPR Discussion Papers 9822, C.E.P.R. Discussion Papers.
  5. Rapp, Marc Steffen & Schwetzler, Bernhard, 2008. "Equilibrium security prices with capital income taxes and an exogenous interest rate," CEFS Working Paper Series 2008-08, Center for Entrepreneurial and Financial Studies (CEFS), Technische Universität München.
  6. Rainer Niemann, 2007. "The Impact of Tax Uncertainty on Irreversible Investment," CESifo Working Paper Series 2075, CESifo Group Munich.
  7. Marekwica, Marcel, 2012. "Optimal tax-timing and asset allocation when tax rebates on capital losses are limited," Journal of Banking & Finance, Elsevier, vol. 36(7), pages 2048-2063.
  8. Clemens Sialm, 2005. "Tax Changes and Asset Pricing: Time-Series Evidence," NBER Working Papers 11756, National Bureau of Economic Research, Inc.

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