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

Author

Listed:
  • Patrick Asea

    (UCLA & NBER)

  • Stephen Turnovsky

    (University of Washington)

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."
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Patrick Asea & Stephen Turnovsky, 1997. "Capital Income Taxation and Risk-Taking in a Small Open Economy," UCLA Economics Working Papers 768, UCLA Department of Economics.
  • Handle: RePEc:cla:uclawp:768
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    File URL: http://www.econ.ucla.edu/workingpapers/wp768.pdf
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    Cited by:

    1. repec:eee:pubeco:v:154:y:2017:i:c:p:137-159 is not listed on IDEAS
    2. Ghysels, Eric & Guay, Alain, 2003. "Structural change tests for simulated method of moments," Journal of Econometrics, Elsevier, vol. 115(1), pages 91-123, July.
    3. Turnovsky, Stephen J. & Chattopadhyay, Pradip, 2003. "Volatility and growth in developing economies: some numerical results and empirical evidence," Journal of International Economics, Elsevier, pages 267-295.
    4. Khorunzhina, Natalia, 2013. "Structural estimation of stock market participation costs," Journal of Economic Dynamics and Control, Elsevier, vol. 37(12), pages 2928-2942.
    5. Gareth Myles, 2000. "Taxation and economic growth," Fiscal Studies, Institute for Fiscal Studies, pages 141-168.
    6. Giuliano, Paola & Turnovsky, Stephen J., 2003. "Intertemporal substitution, risk aversion, and economic performance in a stochastically growing open economy," Journal of International Money and Finance, Elsevier, pages 529-556.
    7. Osorio, Maria A. & Gulpinar, Nalan & Rustem, Berc, 2008. "A mixed integer programming model for multistage mean-variance post-tax optimization," European Journal of Operational Research, Elsevier, vol. 185(2), pages 451-480, March.
    8. Francesco Menoncin & Paolo M. Panteghini, 2013. "The Johansson-Samuelson Theorem in General Equilibrium: A Rebuttal," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 69(1), pages 57-71, March.
    9. Long Xin & Pelloni Alessandra, 2011. "Welfare improving taxation on savings in a growth model," wp.comunite 0091, Department of Communication, University of Teramo.
    10. Pommeret, Aude & Smith, William T., 2005. "Fertility, volatility, and growth," Economics Letters, Elsevier, pages 347-353.
    11. Ziegler, Andreas, 2001. "Simulated z-tests in multinomial probit models," ZEW Discussion Papers 01-53, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    12. Long, Xin & Pelloni, Alessandra, 2017. "Factor income taxation in a horizontal innovation model," Journal of Public Economics, Elsevier, pages 137-159.
    13. Gokan, Yoichi, 2002. "Alternative government financing and stochastic endogenous growth," Journal of Economic Dynamics and Control, Elsevier, vol. 26(4), pages 681-706, April.
    14. Dominika Langenmayr & Rebecca Lester, 2013. "Taxation and corporate risk-taking," Working Papers 1316, Oxford University Centre for Business Taxation.
    15. Wälde, Klaus, 2011. "Production technologies in stochastic continuous time models," Journal of Economic Dynamics and Control, Elsevier, vol. 35(4), pages 616-622, April.
    16. Kenc, Turalay, 2004. "Taxation, risk-taking and growth: a continuous-time stochastic general equilibrium analysis with labor-leisure choice," Journal of Economic Dynamics and Control, Elsevier, vol. 28(8), pages 1511-1539, June.
    17. Katharina Finke & Jost H. Heckemeyer & Timo Reister & Christoph Spengel, 2013. "Impact of Tax-Rate Cut cum Base-Broadening Reforms on Heterogeneous Firms: Learning from the German Tax Reform of 2008," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 69(1), pages 72-114, March.
    18. 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.
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    More about this item

    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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