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
Date Written: August 7, 1996
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: Suggested Citation