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Proportional Tax under Ambiguity

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  • Dong, Xueqi
  • Liu, Shuo Li

Abstract

This paper studies how investment can be influenced by common tax and monetary policies, where investment is measured by the proportion of an investor’ wealth invested in the asset that pays a random return. We further prove that all risk- uncertainty averse individuals will increase investments if and only if a type of proportional tax with full loss offset (Domar and Musgrave 1944, QJE) is imposed. This result holds: 1. under ambiguity, that is when the probability distribution of an as- set’s return is unknown; 2. when borrowing in the safe asset is allowed.

Suggested Citation

  • Dong, Xueqi & Liu, Shuo Li, 2021. "Proportional Tax under Ambiguity," MPRA Paper 107668, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:107668
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Proportional Tax with Full Loss Offset; Ambiguity; Portfolio Choice;
    All these keywords.

    JEL classification:

    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General

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