Taxation of Labor Income and the Demand for Risky Assets

Board of Governors of the Federal Reserve System Finance & Econ. Disc. Series 96-32

Posted: 1 Oct 1996

See all articles by Douglas W. Elmendorf

Douglas W. Elmendorf

Harvard Kennedy School

Miles S. Kimball

University of Michigan at Ann Arbor - Department of Economics; University of Colorado Boulder; Center for Economic and Social Research, USC; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: August 7, 1996

Abstract

It is well known that the implicit insurance provided by labor income taxes can reduce total saving. We show that this insurance can change the composition of saving as well because the reduction in labor-income risk may affect the amount of financial risk that an individual chooses to bear. Given plausible restrictions on preferences, any change in taxes that reduces an individual's labor-income risk and does not make her worse off will lead her to invest more in risky assets. This effect can be quantitatively important for realistic changes in tax rates.

JEL Classification: D11, D91, G11, H24, H31

Suggested Citation

Elmendorf, Douglas W. and Kimball, Miles S., Taxation of Labor Income and the Demand for Risky Assets (August 7, 1996). Board of Governors of the Federal Reserve System Finance & Econ. Disc. Series 96-32. Available at SSRN: https://ssrn.com/abstract=3517

Douglas W. Elmendorf (Contact Author)

Harvard Kennedy School ( email )

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Miles S. Kimball

University of Michigan at Ann Arbor - Department of Economics ( email )

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University of Colorado Boulder ( email )

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Center for Economic and Social Research, USC ( email )

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National Bureau of Economic Research (NBER)

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