Taxes and Financial Portfolio Choices: Evidence from the Tax Rate Reductions of the 2001 and 2003 Tax Acts

43 Pages Posted: 24 Jan 2011

See all articles by Laura Kawano

Laura Kawano

University of Michigan at Ann Arbor

Date Written: January 23, 2011

Abstract

This paper exploits the tax rate variation generated by the Economic Growth and Tax Reconciliation Act of 2001 (which reduced ordinary income tax rates) and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (which reduced capital gains and dividend tax rates) to estimate the effect of taxes on financial portfolio allocations. Using data from the 1998 and 2007 Survey of Consumer Finances samples, I examine changes to household financial portfolio allocations across six asset classes. I find limited evidence of households responses to the tax reductions. There is weak evidence that increase in the tax advantage of equities relative to interest income caused households to shift portfolios towards taxable equities. There is also evidence that households shelter their more heavily taxed assets in retirement accounts.

Keywords: Taxation, Portfolio Choice

JEL Classification: H20, G11

Suggested Citation

Kawano, Laura, Taxes and Financial Portfolio Choices: Evidence from the Tax Rate Reductions of the 2001 and 2003 Tax Acts (January 23, 2011). Available at SSRN: https://ssrn.com/abstract=1746022 or http://dx.doi.org/10.2139/ssrn.1746022

Laura Kawano (Contact Author)

University of Michigan at Ann Arbor ( email )

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