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Stochastic Taxation and Asset Pricing in Dynamic General Equilibrium

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Clemens Sialm

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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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Handle: RePEc:nbr:nberwo:9301

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G1 - Financial Economics - - General Financial Markets
H2 - Public Economics - - Taxation, Subsidies, and Revenue

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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. Clemens Sialm, 2005. "Tax Changes and Asset Pricing: Time-Series Evidence," NBER Working Papers 11756, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  2. Rainer Niemann, 2007. "The Impact of Tax Uncertainty on Irreversible Investment," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  3. repec:bep:dewple:2006-1-1162 is not listed on IDEAS
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