Taxation of Labor Income and the Demand for Risky Assets

31 Pages Posted: 14 Nov 2007 Last revised: 9 Sep 2010

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)

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Date Written: November 1991

Abstract

The effect of uninsured labor income risk on the joint saving/portfolio composition decision is analyzed using new techniques from the theory of multiple risk-bearing. Applying this analysis, the effect of labor income taxes on the demand for risky securities is considered. It is well known that when private insurance markets are incomplete, the insurance afforded by labor income taxes can reduce overall saving. This paper establishes that - given plausible restrictions on preferences - the insurance afforded by labor income taxes increases the demand for risky securities, even when labor income is statistically independent of the returns to risky securities.

Suggested Citation

Elmendorf, Douglas W. and Kimball, Miles S., Taxation of Labor Income and the Demand for Risky Assets (November 1991). NBER Working Paper No. w3904. Available at SSRN: https://ssrn.com/abstract=474007

Douglas W. Elmendorf (Contact Author)

Harvard Kennedy School ( email )

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Miles S. Kimball

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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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