Embedded Tax Liabilities & Portfolio Choice

Posted: 11 Jul 2011 Last revised: 10 Jun 2014

See all articles by Phillip Ashley Turvey

Phillip Ashley Turvey

Queensland University of Technology - School of Economics and Finance

Anup K. Basu

Queensland University of Technology; Financial Research Network (FIRN)

Peter Verhoeven

Queensland University of Technology - QUT Business School; Financial Research Network (FIRN)

Date Written: August 24, 2011

Abstract

This study presents an improved method of dealing with embedded tax liabilities in portfolio choice. We argue that using a risk-free discount rate is appropriate for calculating the present value of future tax liabilities. Supportive of recent research, our results found a taxation-induced preference of holding equities over bonds, and a location preference of holding equities in the taxable account and bonds in retirement accounts. These important findings contrast with traditional investment advice which suggests a greater capacity for risk in retirement accounts.

Keywords: Taxes, asset allocation, portfolio choice

JEL Classification: G11

Suggested Citation

Turvey, Phillip Ashley and Basu, Anup K. and Verhoeven, Peter, Embedded Tax Liabilities & Portfolio Choice (August 24, 2011). Midwest Finance Association 2012 Annual Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1883488 or http://dx.doi.org/10.2139/ssrn.1883488

Phillip Ashley Turvey (Contact Author)

Queensland University of Technology - School of Economics and Finance ( email )

GPO Box 2434
2 George Street
Brisbane, Queensland 4001
Australia

Anup K. Basu

Queensland University of Technology ( email )

2 George Street
Brisbane, Queensland 4000
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Peter Verhoeven

Queensland University of Technology - QUT Business School ( email )

GPO Box 2434
Brisbane, Queensland 4001
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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