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CEFS Working Paper Series, Center for Entrepreneurial and Financial Studies, Technische Universität München >
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http://hdl.handle.net/10419/48419
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| Title: | | Equilibrium security prices with capital income taxes and an exogenous interest rate  |
| Authors: | | Rapp, Marc Steffen Schwetzler, Bernhard |
| Issue Date: | | 2008 |
| Series/Report no.: | | CEFS working paper series 2008-08 |
| Abstract: | | 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. |
| Subjects: | | equilibrium security prices capital income tax equity premium |
| JEL: | | G12 G18 H24 |
| Document Type: | | Working Paper |
| Appears in Collections: | | CEFS Working Paper Series, Center for Entrepreneurial and Financial Studies, Technische Universität München
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