Tax Shocks, Political Cycles, and Asset Prices

41 Pages Posted: 24 Aug 2018 Last revised: 19 Jun 2019

See all articles by Ruchith Dissanayake

Ruchith Dissanayake

Queensland University of Technology - School of Economics and Finance

Date Written: June 16, 2019

Abstract

By combining information in equity prices with narratively identified events, I construct a measure of income tax shocks (i.e., expectations about tax cuts). A positive tax shock decreases (increases) future tax revenues (government debt). Wealth effects of tax shocks depend on the political cycle. Tax shocks cause high wealth states during Republican administrations, whereas the effects are trivial during Democratic administrations. During Republican presidencies, tax shocks carry a positive premium since they increase the volatility of consumption growth. An investment strategy that exploits the tax shocks premium across the political cycle generates significant returns over commonly used asset pricing models.

Keywords: Tax Shock, Asset Pricing Model, Political Cylce

JEL Classification: G12

Suggested Citation

Dissanayake, Ruchith, Tax Shocks, Political Cycles, and Asset Prices (June 16, 2019). Available at SSRN: https://ssrn.com/abstract=3230565 or http://dx.doi.org/10.2139/ssrn.3230565

Ruchith Dissanayake (Contact Author)

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

GPO Box 2434
2 George Street
Brisbane, Queensland 4001
Australia

HOME PAGE: http://www.rdissanayake.com

Register to save articles to
your library

Register

Paper statistics

Downloads
50
Abstract Views
373
PlumX Metrics