Capital Income Taxation and Risk-Taking in a Small Open Economy

49 Pages Posted: 20 Jul 2000 Last revised: 18 Apr 2008

See all articles by Patrick K. Asea

Patrick K. Asea

affiliation not provided to SSRN

Stephen J. Turnovsky

University of Washington - Institute for Economic Research; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: September 1997

Abstract

How do capital income taxes affect household portfolio choice and growth? We" approach this question within the context of a stochastic model of a small open economy in" which taxes on income from domestic capital (equity) and foreign bonds affect household" portfolio choice, welfare and the growth rate of the economy. The theoretical and numerical" analysis demonstrates the important role that risk plays in determining the mean and variability" of growth as well as the conditions under which a higher tax rate can be welfare improving. To" shed more light on the complex theoretical interaction between taxes and risk-taking we estimate" a reduced-form multinomial probit model of household portfolio choice using the method of" simulated moments. The empirical evidence is in stark contrast to the conventional wisdom " we find that higher taxes make it less likely that the household will hold risky assets."

Suggested Citation

Asea, Patrick K. and Turnovsky, Stephen J., Capital Income Taxation and Risk-Taking in a Small Open Economy (September 1997). NBER Working Paper No. w6189. Available at SSRN: https://ssrn.com/abstract=225946

Patrick K. Asea (Contact Author)

affiliation not provided to SSRN

No Address Available

Stephen J. Turnovsky

University of Washington - Institute for Economic Research ( email )

Seattle, WA 98195
United States
206-685-8028 (Phone)
206-543-5955 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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