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Taxation and Risk Taking: A General Equilibrium Perspective

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  • Louis Kaplow

Abstract

Taxation and risk taking are examined in a general equilibrium model that incorporates uncertain government revenue in a nonrestrictive manner and allows the government to influence its revenue through portfolio investments as well as through tax policy. It is demonstrated that each of a wide range of taxes can be decomposed into some combination of a wage tax, an ex ante wealth tax, and a modification of the government's investment portfolio. For example, a tax on investment returns (from risky and riskless assets) is equivalent, with an adjustment in the government's portfolio, to a tax on the riskless component of investment returns or to an ex ante wealth tax -- both of which absorb no private risk and yield certain revenue. The concept of equivalence employed is strong: two regimes are equivalent if, for each state of nature, individuals' wealth and government revenue are the same under both regimes and total investment in each asset is the same. Implications for behavior (private and total risk taking) and welfare are immediate. Moreover, these results are independent of the government's objective function, the manner in which individual utility depends on government expenditures, and some of the restrictive assumptions found necessary in previous treatments of the problem.

Suggested Citation

  • Louis Kaplow, 1991. "Taxation and Risk Taking: A General Equilibrium Perspective," NBER Working Papers 3709, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:3709
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    Cited by:

    1. Magnus Henrekson & Tino Sanandaji, 2011. "Entrepreneurship and the theory of taxation," Small Business Economics, Springer, vol. 37(2), pages 167-185, September.
    2. Paolo M. Panteghini, 2009. "On the equivalence between labor and consumption taxation," Economics Bulletin, AccessEcon, vol. 29(2), pages 622-629.
    3. Syed Ahsan & Peter Tsigaris, 1998. "The design of a consumption tax under capital risk," Journal of Economics, Springer, vol. 68(1), pages 53-78, February.
    4. 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.
    5. Devereux, Michael P., 2003. "Taxing Risky Investment," CEPR Discussion Papers 4053, C.E.P.R. Discussion Papers.
    6. Alan J. Auerbach, 2006. "The Choice Between Income and Consumption Taxes: A Primer," NBER Working Papers 12307, National Bureau of Economic Research, Inc.
    7. Sialm, Clemens, 2006. "Stochastic taxation and asset pricing in dynamic general equilibrium," Journal of Economic Dynamics and Control, Elsevier, vol. 30(3), pages 511-540, March.
    8. David F. Bradford, 1996. "Fixing Capital Gains: Symmetry, Consistency and Correctness in the Taxation of Financial Instruments," NBER Working Papers 5754, National Bureau of Economic Research, Inc.
    9. repec:pri:cepsud:93bradford is not listed on IDEAS
    10. David M. Schizer & Michael R. Powers & Martin Shubik, 2003. "Market Bubbles and Wasteful Avoidance: Tax and Regulatory Constraints on Short Sales," Yale School of Management Working Papers ysm356, Yale School of Management.
    11. Schindler, Dirk, 2008. "Human Capital, Multiple Income Risk and Social Insurance," Discussion Papers 2008/18, Norwegian School of Economics, Department of Business and Management Science.
    12. Francesco Menoncin & Paolo Panteghini, 2009. "Retrospective Capital Gains Taxation in the Real World," CESifo Working Paper Series 2674, CESifo Group Munich.
    13. Alan J. Auerbach, 2006. "Who Bears the Corporate Tax? A Review of What We Know," NBER Chapters,in: Tax Policy and the Economy, Volume 20, pages 1-40 National Bureau of Economic Research, Inc.
    14. Niemann, Rainer, 2007. "Risikoübernahme, Arbeitsanreiz und differenzierende Besteuerung," arqus Discussion Papers in Quantitative Tax Research 28, arqus - Arbeitskreis Quantitative Steuerlehre.
    15. Sims, Theodore S., 2015. "Income taxation, wealth effects, and uncertainty: Portfolio adjustments with isoelastic utility and discrete probability," Economics Letters, Elsevier, vol. 135(C), pages 52-54.
    16. Auerbach, Alan J. & Bradford, David F., 2004. "Generalized cash-flow taxation," Journal of Public Economics, Elsevier, vol. 88(5), pages 957-980, April.
    17. Syed M. Ahsan & Panagiotis Tsigaris, 2003. "Choice of Tax Base Revisited: Cash Flow vs. Prepayment Approaches to Consumption Taxation," CESifo Working Paper Series 983, CESifo Group Munich.
    18. Jeff Huther, 1999. "An Integrated Approach to Government Financial Policy," Treasury Working Paper Series 99/08, New Zealand Treasury.
    19. Bas Jacobs & Dirk Schindler & Hongyan Yang, 2012. "Optimal Taxation of Risky Human Capital," Scandinavian Journal of Economics, Wiley Blackwell, vol. 114(3), pages 908-931, September.
    20. Dirk Schindler, 2006. "Optimal Income Taxation with a Risky Asset – The Triple Income Tax," CESifo Working Paper Series 1834, CESifo Group Munich.

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