Differential Income Taxation and Household Asset Allocation

77 Pages Posted: 22 Sep 2010

See all articles by Richard R. Ochmann

Richard R. Ochmann

German Institute for Economic Research (DIW Berlin)

Date Written: September 2010


This paper empirically investigates the effects of differential income taxation on households' portfolio choice and asset allocation applying a two-stage budgeting model of asset demand to German survey data. The model is structured into the discrete asset choice and the continuous asset choice, and the marginal income tax rate is simulated in a module of income taxation. Households that face relatively higher tax rates are found to have relatively greater demand for tax-privileged assets than households in the lower tax brackets. The higher the marginal tax rate the greater demand is for non-owner-occupied housing, for mortgage repayments, for building society deposits, for stocks, for insurances, and for consumer credits, whereas demand is lower for owner-occupied housing, bank deposits, and bonds.

Keywords: Household asset allocation, portfolio choice, two-stage budgeting, capital income taxation

JEL Classification: C35, G11, H31

Suggested Citation

Ochmann, Richard R., Differential Income Taxation and Household Asset Allocation (September 2010). DIW Berlin Discussion Paper No. 1058, Available at SSRN: https://ssrn.com/abstract=1680286 or http://dx.doi.org/10.2139/ssrn.1680286

Richard R. Ochmann (Contact Author)

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstra├če 58
Berlin, 10117

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