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New Evidence on Taxes and Portfolio Choice

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  • Sule Alan
  • Kadir Atalay
  • Thomas F. Crossley
  • Sung-Hee Jeon

Abstract

Identifying the effect of differential taxation on portfolio allocation requires exogenous variation in marginal tax rates. Marginal tax rates vary with income, but income surely affects portfolio choice directly. In systems of individual taxation – like Canada’s – couples with the same household income can face different effective tax rates on capital income when labor income is distributed differently within households. Using this source of variation we find statistically significant but economically modest responses to taxation. In a “placebo” test, using data from the U.S. (which has joint taxation), we find no effect of the intra-household distribution of labor income on portfolios.

Suggested Citation

  • Sule Alan & Kadir Atalay & Thomas F. Crossley & Sung-Hee Jeon, 2009. "New Evidence on Taxes and Portfolio Choice," Social and Economic Dimensions of an Aging Population Research Papers 245, McMaster University.
  • Handle: RePEc:mcm:sedapp:245
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    Cited by:

    1. Huizinga, Harry & Todtenhaupt, Maximilian & Voget, Johannes & Wagner, W.B., 2019. "Taxation and the External Wealth of Nations : Evidence from Bilateral Portfolio Holdings," Discussion Paper 2019-029, Tilburg University, Center for Economic Research.
    2. Richard Ochmann, 2016. "Distributional and welfare effects of Germany’s year 2000 tax reform: the context of savings and portfolio choice," Empirical Economics, Springer, vol. 51(1), pages 93-123, August.
    3. Sauter, Nicolas & Walliser, Jan & Winter, Joachim, 2015. "Tax incentives, bequest motives, and the demand for life insurance: evidence from a natural experiment in Germany," Journal of Pension Economics and Finance, Cambridge University Press, vol. 14(4), pages 525-553, October.
    4. Buettner, Thiess & Erbe, Katharina & Grimm, Veronika, 2019. "Tax planning of married couples and intra-household income inequality," Journal of Public Economics, Elsevier, vol. 179(C).
    5. Richard Ochmann, 2013. "Asset demand in the financial AIDS portfolio model -- evidence from a major tax reform," Applied Financial Economics, Taylor & Francis Journals, vol. 23(8), pages 649-670, April.
    6. Schalck, Christophe, 2017. "Tax measures and household financial behaviour: Evidence from France," The Quarterly Review of Economics and Finance, Elsevier, vol. 66(C), pages 127-135.
    7. Richard Ochmann, 2014. "Differential income taxation and household asset allocation," Applied Economics, Taylor & Francis Journals, vol. 46(8), pages 880-894, March.
    8. Erik Floor & Arjan Lejour, 2014. "Saving behavior and risk taking: Evidence from the Dutch Tax Reform in 2001," CPB Discussion Paper 273, CPB Netherlands Bureau for Economic Policy Analysis.
    9. Levaggi, Rosella & Menoncin, Francesco, 2016. "Optimal dynamic tax evasion: A portfolio approach," Journal of Economic Behavior & Organization, Elsevier, vol. 124(C), pages 115-129.
    10. Richard Ochmann, 2010. "Distributional and Welfare Effects of Germany's Year 2000 Tax Reform," Discussion Papers of DIW Berlin 1083, DIW Berlin, German Institute for Economic Research.
    11. Alan Sule & Honoré Bo E. & Hu Luojia & Leth-Petersen Søren, 2014. "Estimation of Panel Data Regression Models with Two-Sided Censoring or Truncation," Journal of Econometric Methods, De Gruyter, vol. 3(1), pages 1-20, January.
    12. Stefan Groot & Arjan Lejour, 2017. "Tax arbitrage incentives for mortgage prepayment behavior: Evidence from Dutch micro data," CPB Discussion Paper 350.rdf, CPB Netherlands Bureau for Economic Policy Analysis.
    13. Frank M. Fossen & Ray Rees & Davud Rostam-Afschar & Viktor Steiner, 2020. "The effects of income taxation on entrepreneurial investment: A puzzle?," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 27(6), pages 1321-1363, December.
    14. Fossen, Frank M. & Rees, Ray & Rostam-Afschar, Davud & Steiner, Viktor, 2017. "How do entrepreneurial portfolios respond to income taxation?," Hohenheim Discussion Papers in Business, Economics and Social Sciences 12-2017, University of Hohenheim, Faculty of Business, Economics and Social Sciences.
    15. Jaroslava Hlouskova & Panagiotis Tsigaris, 2012. "Capital income taxation and risk taking under prospect theory," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 19(4), pages 554-573, August.
    16. Nicolas Sauter & Jan Walliser & Joachim Winter, 2010. "Tax Incentives, Bequest Motives, and the Demand for Life Insurance: Evidence from two Natural Experiments in Germany," CESifo Working Paper Series 3040, CESifo.
    17. Zoutman, Floris T., 2014. "The Effect of Capital Taxes on Household's Portfolio Composition and Intertemporal Choice: Evidence from the Dutch 2001 Capital Income Tax Reform," Discussion Papers 2014/23, Norwegian School of Economics, Department of Business and Management Science.
    18. Jeffrey Thompson, 2012. "Raising Revenue from High-Income Households: Should States Continue to Place the Lowest Tax Rates on Those with the Highest Incomes?," Published Studies revenue_peri_march5, Political Economy Research Institute, University of Massachusetts at Amherst.
    19. Stefan Groot & Arjan Lejour, 2017. "Tax arbitrage incentives for mortgage prepayment behavior: Evidence from Dutch micro data," CPB Discussion Paper 350, CPB Netherlands Bureau for Economic Policy Analysis.
    20. Groot, Stefan P.T. & Lejour, Arjan M., 2018. "Financial incentives for mortgage prepayment behavior: Evidence from Dutch micro data," Journal of Housing Economics, Elsevier, vol. 41(C), pages 237-250.
    21. Frank Fossen & Ray Rees & Davud Rostam-Afschar & Viktor Steiner, 2017. "How Do Entrepreneurial Portfolios Respond to Taxation?," CESifo Working Paper Series 6558, CESifo.
    22. Erik Floor & Arjan Lejour, 2014. "Saving behavior and risk taking: Evidence from the Dutch Tax Reform in 2001," CPB Discussion Paper 273.rdf, CPB Netherlands Bureau for Economic Policy Analysis.
    23. Katherine Grace Carman & Angela A. Hung, 2017. "Household Retirement Saving The Location of Savings Between Spouses," Working Papers WR-1166, RAND Corporation.

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    More about this item

    Keywords

    Household Portfolio Choice; Tax;

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household

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