New evidence on taxes and portfolio choice

Abstract

Sung-Hee JeonThe University of Melbourne and SEDAP Abstract: Identifying the effect of differential taxation on portfolio allocation requires exogenous variation in marginal tax rates. Marginal tax rates vary with income, but income surely affects portfolio choice directly. In systems of individual taxation -like Canada'scouples with the same household income can face different effective tax rates on capital income when labor income is distributed differently within households. Using this source of variation we find statistically significant but economically modest responses to taxation. In a "placebo" test, using data from the U.S. (which has joint taxation), we find no effect of the intra-household distribution of labor income on portfolios.Résumé: L'identification des effets de la taxation différentielle du revenu sur l'allocation de portefeuille des ménages nécessite une variation exogène du taux d'imposition marginal. Le taux d'imposition marginal varie selon le revenu, mais il ne fait aucun doute que le revenu influence aussi directement les choix de portefeuille. Dans un système de taxation individuelle -comme celui du Canada -les couples bénéficiant d'un revenu du ménage identique peuvent faire face à des taux d'imposition sur le capital différents selon la répartition des revenus du travail à l'intérieur du ménage. En utilisant cette source de variation exogène, nous trouvons qu'une variation du taux d'imposition entraîne une réponse des ménages statistiquement significative bien qu'économiquement modeste. Dans un test « placebo », utilisant des données provenant des États Unis (où l'imposition des couples mariés est conjointe), nous n'observons aucun effet de la répartition des revenus du travail à l'intérieur des ménages sur le choix de portefeuille de ces derniers. JEL classifications: G11, H24, H31

The Effect of Capital Taxes on Household's Portfolio Composition and Intertemporal Choice: Evidence from the Dutch 2001 Capital Income Tax Reform

“…This contrasts sharply with estimates in the US and Canada in e.g. King and Leape (1998), Poterba and Samwick (2003) and Alan et al (2010), where portfolio allocation is related to an overall measure of the marginal tax rate on capital income. The results in these studies can inform policy makers whether an increase in the marginal tax rate shifts asset demand from less to more tax-favored assets, but are unable to inform the policy makers about the effect of increasing the tax-favored status of a particular asset by one percent.…”

“…However, findings in this paper broadly correspond with the modest behavioral response found in Alan et al (2010), suggesting that not controlling for unobserved household heterogeneity leads to an overestimation of the impact of taxation.…”

“…Finally, the pre-reform tax on capital-income was only levied over cash returns. As such, households with relatively low cash returns and high capital gains paid a lower tax on their assets 9 Note that this source of variation runs counter to the one exploited in Alan et al (2010) in the Canadian tax system. In Canada, households can choose which partner pays capital income taxes.…”

“…Hubbard, 1985, King and Leape, 1998and Poterba and Samwick, 2003. However, in a recent article Alan et al (2010) partially control for unobserved household heterogeneity by cleverly exploiting intra-household variation in the capital income tax rate in the Canadian tax system. They find a significant but relatively modest effect of taxation on portfolio composition.…”

Household Retirement Saving: The Location of Savings Between Spouses

“…They find that assets were shifted to and claimed by the spouse facing lower marginal tax rates as a result of the policy change. Alan et al (2010) investigate how differential taxation influences household asset allocation among Canadians using the Canadian Survey of Financial Security. They exploit a 1988 tax reform that effectively reduced the marginal tax rate of women married to high-income spouses, but not women married to low-income spouses.…”