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Taxation and Household Portfolio Composition: U.S. Evidence from the 1980s and 1990s

  • James M. Poterba
  • Andrew Samwick

This paper explores the relationship between household marginal income tax rates, the set of assets that households own, and the portfolio shares accounted for by each of these assets. It analyzes data from the 1983, 1989, 1992, and 1995 Surveys of Consumer Finances and develops a new algorithm for imputing federal marginal tax rates to households in these surveys. The empirical findings suggest that a household's marginal tax rate has an important effect its asset allocation decisions. The probability that a household owns tax-advantaged assets is strongly related to its tax rate on ordinary income. In addition, the amount of investment through tax-deferred accounts such as 401(k) plans and IRAs is an increasing function of the household's marginal tax rate. Holdings of corporate stock, which is taxed less heavily than interest bearing assets, and of tax-exempt bonds are also increasing in the household's marginal tax rate. Holdings of heavily taxed assets, such as corporate bonds and interest-bearing accounts, decline as a share of wealth as a household's marginal tax rate increases.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7392.

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Date of creation: Oct 1999
Date of revision:
Publication status: published as Poterba, James M. and Andrew A. Samwick. "Taxation And Household Portfolio Composition: US Evidence From The 1980s And 1990s," Journal of Public Economics, 2003, v87(1,Jan), 5-38.
Handle: RePEc:nbr:nberwo:7392
Note: AG AP PE
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  1. Poterba, James M., 2002. "Taxation, risk-taking, and household portfolio behavior," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 3, chapter 17, pages 1109-1171 Elsevier.
  2. James M. Poterba & David A. Wise, 1996. "Individual Financial Decisions in Retirement Saving Plans and The Provision of Resources for Retirement," NBER Working Papers 5762, National Bureau of Economic Research, Inc.
  3. Leape, Jonathan I., 1987. "Taxes and transaction costs in asset market equilibrium," Journal of Public Economics, Elsevier, vol. 33(1), pages 1-20, June.
  4. Alan J. Auerbach & Mervyn A. King, 1983. "Taxation, Portfolio Choice, and Debt-Equity Ratios: A General Equilibrium Model," The Quarterly Journal of Economics, Oxford University Press, vol. 98(4), pages 587-609.
  5. Slemrod,Joel, 1997. "Tax Progressivity and Income Inequality," Cambridge Books, Cambridge University Press, number 9780521587761, September.
  6. James M. Poterba & Andrew Samwick, 2001. "Household Portfolio Allocation over the Life Cycle," NBER Chapters, in: Aging Issues in the United States and Japan, pages 65-104 National Bureau of Economic Research, Inc.
  7. Feldstein, Martin S, 1976. "Personal Taxation and Portfolio Composition: An Econometric Analysis," Econometrica, Econometric Society, vol. 44(4), pages 631-50, July.
  8. Daniel Bergstresser & James Poterba, 2000. "Do After-Tax Returns Affect Mutual Fund Inflows?," NBER Working Papers 7595, National Bureau of Economic Research, Inc.
  9. Feenberg, D.R. & Poterba, J.M., 1991. "Which Households Own Municipal Bonds? Evidence from Tax Returns," Working papers 588, Massachusetts Institute of Technology (MIT), Department of Economics.
  10. McDonald, Robert L., 1983. "Government debt and private leverage : An extension of the Miller theorem," Journal of Public Economics, Elsevier, vol. 22(3), pages 303-325, December.
  11. John B. Shoven, 1999. "The Location and Allocation of Assets in Pension and Conventional Savings Accounts," NBER Working Papers 7007, National Bureau of Economic Research, Inc.
  12. Maki, Dean M., 1996. "Portfolio Shuffling and Tax Reform," National Tax Journal, National Tax Association, vol. 49(3), pages 317-29, September.
  13. James M. Poterba & Steven F. Venti & David A. Wise, 1999. "Implications of Rising Personal Retirement Saving," NBER Working Papers 6295, National Bureau of Economic Research, Inc.
  14. King, Mervyn A. & Leape, Jonathan I., 1998. "Wealth and portfolio composition: Theory and evidence," Journal of Public Economics, Elsevier, vol. 69(2), pages 155-193, June.
  15. Hubbard, Robert Glenn, 1985. "Personal Taxation, Pension Wealth, and Portfolio Composition," The Review of Economics and Statistics, MIT Press, vol. 67(1), pages 53-60, February.
  16. Miller, Merton H, 1977. "Debt and Taxes," Journal of Finance, American Finance Association, vol. 32(2), pages 261-75, May.
  17. Robert B. Avery & Gregory E. Elliehausen & Glenn B. Canner & Thomas A. Gustafson, 1984. "Survey of consumer finances, 1983: a second report," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Dec, pages 857-868.
  18. Robert B. Avery & Gregory E. Elliehausen & Glenn B. Canner & Thomas A. Gustafson, 1984. "Survey of consumer finances, 1983," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Sep, pages 679-692.
  19. Agell, Jonas & Edin, Per-Anders, 1990. " Marginal Taxes and the Asset Portfolios of Swedish Households," Scandinavian Journal of Economics, Wiley Blackwell, vol. 92(1), pages 47-64.
  20. Joel M. Dickson & John B. Shoven, 1995. "Taxation and Mutual Funds: An Investor Perspective," NBER Chapters, in: Tax Policy and the Economy, Volume 9, pages 151-180 National Bureau of Economic Research, Inc.
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