Working Paper: NBER ID: w7392
Authors: James M. Poterba; Andrew A. Samwick
Abstract: This paper explores the relationship between household marginal income tax rates, the set of assets that households own, and the portfolio shares accounted for by each of these assets. It analyzes data from the 1983, 1989, 1992, and 1995 Surveys of Consumer Finances and develops a new algorithm for imputing federal marginal tax rates to households in these surveys. The empirical findings suggest that a household's marginal tax rate has an important effect its asset allocation decisions. The probability that a household owns tax-advantaged assets is strongly related to its tax rate on ordinary income. In addition, the amount of investment through tax-deferred accounts such as 401(k) plans and IRAs is an increasing function of the household's marginal tax rate. Holdings of corporate stock, which is taxed less heavily than interest bearing assets, and of tax-exempt bonds are also increasing in the household's marginal tax rate. Holdings of heavily taxed assets, such as corporate bonds and interest-bearing accounts, decline as a share of wealth as a household's marginal tax rate increases.
Keywords: taxation; household portfolio; asset allocation; marginal tax rates
JEL Codes: H24; G11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Household Marginal Tax Rate (H31) | Probability of Owning Tax-Advantaged Assets (G52) |
| Household Marginal Tax Rate (H31) | Amount Invested in Tax-Deferred Accounts (H26) |
| Household Marginal Tax Rate (H31) | Holdings of Heavily Taxed Assets (H26) |