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

59 Pages Posted: 28 Feb 2000 Last revised: 14 Oct 2010

See all articles by James M. Poterba

James M. Poterba

National Bureau of Economic Research (NBER); Massachusetts Institute of Technology (MIT) - Department of Economics

Andrew A. Samwick

Dartmouth College - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: October 1999

Abstract

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.

Suggested Citation

Poterba, James M. and Samwick, Andrew A., Taxation and Household Portfolio Composition: U.S. Evidence from the 1980s and 1990s (October 1999). NBER Working Paper No. w7392. Available at SSRN: https://ssrn.com/abstract=193774

James M. Poterba (Contact Author)

National Bureau of Economic Research (NBER) ( email )

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Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

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Andrew A. Samwick

Dartmouth College - Department of Economics ( email )

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603-646-2122 (Fax)

HOME PAGE: http://www.dartmouth.edu/~samwick

National Bureau of Economic Research (NBER)

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