Working Paper: NBER ID: w9301
Authors: Clemens Sialm
Abstract: Tax rates have fluctuated considerably since federal income taxes were introduced in the United States in 1913. This paper analyzes the effects of stochastic taxation on asset prices in a dynamic general equilibrium model. Stochastic taxation affects the after-tax returns of both risky and safe assets. Whenever taxes change, bond and equity prices adjust to clear the asset markets. These price adjustments affect assets with long durations, such as equities and long-term bonds, more than short-term assets. Under plausible conditions, investors require higher term and equity premia as compensation for the risk introduced by tax changes.
Keywords: No keywords provided
JEL Codes: G1; H2; E4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| stochastic taxation (H29) | level of disposable income (D10) |
| level of disposable income (D10) | variability of consumption (D11) |
| variability of consumption (D11) | asset prices (G19) |
| stochastic taxation (H29) | equity premium (G12) |
| time-varying tax rates (H25) | relative price of consumption (D11) |
| relative price of consumption (D11) | incentives to save and invest (D14) |
| stochastic taxes (H29) | asset prices (G19) |
| taxes (H29) | economic growth rates (O49) |
| economic growth rates (O49) | asset prices (G19) |
| tax changes (H26) | after-tax returns (H24) |
| after-tax returns (H24) | bond prices (G12) |
| after-tax returns (H24) | equity prices (G12) |
| long-term bonds and equities (G12) | higher returns (G12) |