Taxation and Risk Taking: A General Equilibrium Perspective

Louis Kaplow

NBER Working Paper No. 3709 (Also Reprint No. r1940)
Issued in May 1991
NBER Program(s):Public Economics

Taxation and risk taking are examined in a general equilibrium model that incorporates uncertain government revenue in a nonrestrictive manner and allows the government to influence its revenue through portfolio investments as well as through tax policy. It is demonstrated that each of a wide range of taxes can be decomposed into some combination of a wage tax, an ex ante wealth tax, and a modification of the government's investment portfolio. For example, a tax on investment returns (from risky and riskless assets) is equivalent, with an adjustment in the government's portfolio, to a tax on the riskless component of investment returns or to an ex ante wealth tax -- both of which absorb no private risk and yield certain revenue. The concept of equivalence employed is strong: two regimes are equivalent if, for each state of nature, individuals' wealth and government revenue are the same under both regimes and total investment in each asset is the same. Implications for behavior (private and total risk taking) and welfare are immediate. Moreover, these results are independent of the government's objective function, the manner in which individual utility depends on government expenditures, and some of the restrictive assumptions found necessary in previous treatments of the problem.

download in pdf format
   (251 K)

download in djvu format
   (202 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w3709

Published: National Tax Journal, Vol. 47 (1994), pp. 789-798.

Users who downloaded this paper also downloaded* these:
Poterba w8340 Taxation, Risk-Taking, and Household Portfolio Behavior
Asea and Turnovsky w6189 Capital Income Taxation and Risk-Taking in a Small Open Economy
King w0428 Savings and Taxation
Kaplow w3708 A Note on Taxation as Social Insurance for Uncertain Labor Income
Kaplow w3007 Incentives and Government Relief for Risk
NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us