Stochastic Taxation and Asset Pricing in Dynamic General Equilibrium

Clemens Sialm

NBER Working Paper No. 9301
Issued in November 2002
NBER Program(s):   AP   PE

Tax rates have fluctuated considerably since federal income taxes were introduced in the United States in 1913. This paper analyzes the effects of stochastic taxation on asset prices in a dynamic general equilibrium model. Stochastic taxation affects the after-tax returns of both risky and safe assets. Whenever taxes change, bond and equity prices adjust to clear the asset markets. These price adjustments affect assets with long durations, such as equities and long-term bonds, more than short-term assets. Under plausible conditions, investors require higher term and equity premia as compensation for the risk introduced by tax changes.

(487 K)

Published: Sialm, Clemens. "Stochastic Taxation And Asset Pricing In Dynamic General Equilibrium," Journal of Economic Dynamics and Control, 2006, v30(3,Mar), 511-540.

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