Taxes and Investment Choice

Robert M. Dammon () and Chester S. Spatt ()
Additional contact information
Robert M. Dammon: Tepper School of Business, Carnegie Mellon University, Pittsburgh, Pennsylvania 15213
Chester S. Spatt: Tepper School of Business, Carnegie Mellon University, Pittsburgh, Pennsylvania 15213

Annual Review of Financial Economics, 2012, vol. 4, issue 1, 411-429

Abstract: Taxes have a first-order effect on investors' trading decisions and portfolio choices and on the equilibrium pricing of assets. In this review, we investigate how certain features of the tax code impact investors and asset markets. We begin by considering how tax heterogeneity across investors and across securities can lead to market segmentation and discuss the nature of equilibrium prices and allocations with tax clienteles. We then turn our attention to the optimal trading of assets when the tax on capital gains and losses is deferred until the asset is sold. In the absence of portfolio considerations, the optimal trading policies are driven entirely by the desire of investors to minimize the tax cost of owning assets. We next focus on an investor's lifetime portfolio choice problem with capital gains taxes and discuss how the investor's optimal trading decisions and portfolio choices are influenced by both tax and diversification motives. Our discussion includes consideration of nonfinancial income, tax-deferred investment opportunities, and multiple risky assets.

Keywords: tax clienteles; marginal tax rate; capital gains taxation; tax-timing option; capital gains lock-in; asset location; taxes and asset pricing (search for similar items in EconPapers)
JEL-codes: G11 G23 H24 (search for similar items in EconPapers)
Date: 2012
References: Add references at CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
http://www.annualreviews.org/doi/abs/10.1146/annurev-financial-110311-101819 (application/pdf)
Full text downloads are only available to subscribers. Visit the abstract page for more information.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:anr:refeco:v:4:y:2012:p:411-429

Ordering information: This journal article can be ordered from
http://www.annualreviews.org/action/ecommerce

Access Statistics for this article

More articles in Annual Review of Financial Economics from Annual Reviews Annual Reviews 4139 El Camino Way Palo Alto, CA 94306, USA.
Bibliographic data for series maintained by http://www.annualreviews.org ().