Lecture11a.ppt

Lecture11a.ppt - Lecture11:Taxesand PortfolioChoice...

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    Lecture 11:  Taxes and  Portfolio Choice
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    Outline of lecture Describe the wide variation in effective tax rates on different forms of savings What are the economic implications if all investors face the same pattern of tax rates? What if investors are in different tax brackets? Specific complications in taxing capital gains Net revenue collected from taxation of savings
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    Personal tax treatment of different forms  of savings Nominal income fully taxable Interest income Approximation of real income taxable Non-corporate business capital Land Approximation of real income taxable at reduced rate Corporate equity
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    Personal tax treatment of different forms  of savings Income (mostly) tax exempt Owner-occupied housing Consumer durables Roth IRA’s Municipal bonds Cash-flow (consumption) tax treatment Pensions Regular IRA’s, 401(k)’s Human capital
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    What happens if all investors face the  same tax rate? Postpone a couple of complications Assume no inflation Assume capital gains untaxed Basic principle: After-tax returns equalized The question then is what adjusts to achieve equal returns. Answer likely varies by asset.
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    What happens if all investors face the  same tax rates? Cases where return on real asset adjusts Owner-occupied housing, consumer durables: mv ( H ) = r (1- t ) Non-corporate capital: mp ( K)(1- t ) = r (1 -t ) Human capital: Cases where financial return adjusts Municipal bonds: Corporate equity, where t e is the effective personal tax rate on the income e from equity. ) 1 ( t r r m - = ) 1 ( ) 1 ( t r t e e - = - ) 1 ( / t r W W - =
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    Efficiency effects  Return from investing abroad = r Amount of compensation needed to provide more savings = r (1- t ) < r Marginal product of extra investment Owner-occupied housing: r (1- t ) Non-corporate capital: Corporate capital: Municipal capital: r m Taxes lead to too little savings, too much owner- occupied housing and too much corporate capital r K mp = ) ( r t t r e e < - - = 1 1
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    Quantity marginal product r Equilibrium Non-corporate Capital
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    Quantity marginal product r Equilibrium Housing r(1-t) Excess burden
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Lecture11a.ppt - Lecture11:Taxesand PortfolioChoice...

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