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Differential Capital Taxation and Risk Premia: A Separation Result

Author

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  • Francesco Menoncin
  • Paolo Panteghini

Abstract

The article studies differential capital taxation — distinct rates on interest income and risky profits — in a continuous-time representative-agent general equilibrium model with complete markets. It derives closed-form expressions for the equilibrium risk-free rate and the market price of risk. A sharp and non-trivial separation result emerges: although interest-income taxation enters the agent's wealth dynamics and could in principle affect portfolio choice, it leaves equilibrium risk premia entirely unchanged. In contrast, profit taxation generally affects both equilibrium prices, except under CRRA preferences.

Suggested Citation

  • Francesco Menoncin & Paolo Panteghini, 2026. "Differential Capital Taxation and Risk Premia: A Separation Result," CESifo Working Paper Series 12640, CESifo.
    • Handle: RePEc:ces:ceswps:_12640
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    References listed on IDEAS

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    Keywords

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    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies

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