Taxation, Transfer Income and Stock Market Participation

Review of Finance, 19(2), 823-863

34 Pages Posted: 22 Feb 2012 Last revised: 24 Apr 2015

See all articles by Marcel Fischer

Marcel Fischer

Copenhagen Business School

Bjarne Astrup Jensen

Copenhagen Business School - Department of Finance

Date Written: December 10, 2014

Abstract

We study a redistributive tax system that taxes income and redistributes tax revenues in such a way that relatively rich agents are net contributors to relatively poor agents. The closed-form solution of our model allows two main conclusions: (i) Despite ongoing transfers, wealth levels are not harmonized because poorer agents mainly use their transfer income to finance present consumption. (ii) Since the evolution of the economy determines both the level of tax revenues and the evolution of the stock market, transfer income is subject to stock market risk. Hence, poorer agents optimally reduce their equity shares. This can happen to an extent that they optimally no longer participate in the stock market.

Keywords: redistributive taxation, portfolio choice, asset pricing, stock market participation

JEL Classification: G11, E21, H24

Suggested Citation

Fischer, Marcel and Jensen, Bjarne Astrup, Taxation, Transfer Income and Stock Market Participation (December 10, 2014). Review of Finance, 19(2), 823-863. Available at SSRN: https://ssrn.com/abstract=2009301 or http://dx.doi.org/10.2139/ssrn.2009301

Marcel Fischer

Copenhagen Business School ( email )

Solbjerg Plads 3
Frederiksberg C, DK - 2000
Denmark
+45-3815-3628 (Phone)

Bjarne Astrup Jensen (Contact Author)

Copenhagen Business School - Department of Finance ( email )

Solbjerg Plads 3
Frederiksberg, DK-2000
Denmark

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