The Effect of Income Taxation on Risky Investment: An Experimental Test of the Domar-Musgrave Hypothesis

18 Pages Posted: 14 Aug 2017 Last revised: 7 Mar 2018

See all articles by Terrence R. Chorvat

Terrence R. Chorvat

George Mason University School of Law

W. Gavin Ekins

Emory University - Department of Economics

Elizabeth Chorvat

University of Illinois College of Business Department of Accountancy

Date Written: August 11, 2017

Abstract

In this experiment, we test whether the Domar-Musgrave model accurately predicts investor behavior in its paradigmatic setting. Our results indicate that investors only scale up their investments in risky assets to the extent predicted by the model when tax rates are relatively low. Moreover, we found a portion of the subjects decreased investments in risky assets as a reaction to the imposition of symmetric capital taxes. For these subjects, we found that the return on the risky asset in the immediate prior period was a more important determinant of risk-taking.

Keywords: Income Tax, Capital Tax, Full Loss Offsets, Laboratory Experiment

JEL Classification: H21, H24, C91

Suggested Citation

Chorvat, Terrence R. and Ekins, William Gavin and Chorvat, Elizabeth, The Effect of Income Taxation on Risky Investment: An Experimental Test of the Domar-Musgrave Hypothesis (August 11, 2017). George Mason Law & Economics Research Paper No. 17-32. Available at SSRN: https://ssrn.com/abstract=3017396 or http://dx.doi.org/10.2139/ssrn.3017396

Terrence R. Chorvat (Contact Author)

George Mason University School of Law ( email )

3301 Fairfax Drive
Arlington, VA 22201
United States
703-993-8208 (Phone)

William Gavin Ekins

Emory University - Department of Economics ( email )

1602 Fishburne Drive
Atlanta, GA 30322
United States

Elizabeth Chorvat

University of Illinois College of Business Department of Accountancy ( email )

1206 South Sixth Street
Champaign, IL 61820
United States

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