Equilibrium security prices with capital income taxes and an exogenous interest rate

Arbeitspapier

We are interested in the effect of capital income taxes upon security prices when investors face locally segmented stock markets and a global bond market. Therefore, we analyze an equilibrium model of an economy with binomial uncertainty, an exogenous risk-free interest rate and a representative stand-in household. In this setting, the pricing effect for domestic securities is shown to be a function in three determinants: the covariance between pre-tax payoffs of securities and the aggregated market portfolio, the exogenous pre-tax interest rate and the effect of taxation (and redistribution) on the aggregate welfare of the stand-in household. We find that taxation of capital income is nondistorting if tax proceeds are immediately redistributed within the cohort of capital market participants. If, however, taxation represents a policy tool to transfer wealth from capital market participants to non-market participants, the level of the statutory tax rate is reflected in equilibrium security prices and taxation affects households portfolio decisions, which in turn may affect investment decision of firms.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Working Paper ; No. 2008-08

Classification and Topics

• Classification: Wirtschaft ; Asset Pricing; Trading Volume; Bond Interest Rates ; General Financial Markets: Government Policy and Regulation ; Personal Income and Other Nonbusiness Taxes and Subsidies; includes inheritance and gift taxes
• Subject: equilibrium security prices ; capital income tax ; equity premium ; Kapitalertragsteuer ; Optimale Besteuerung ; Steuerwirkung ; Preisniveau ; Externer Effekt ; Zins ; Theorie

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Rapp, Marc Steffen ; Schwetzler, Bernhard
• Event: Veröffentlichung
• (who): Technische Universität München, Center for Entrepreneurial and Financial Studies (CEFS)
• (where): München
• (when): 2008

Further information

• Handle: http://hdl.handle.net/10419/48419
• Last update: 10.03.2025, 11:44 AM CET