Arbitrage and non-linear taxes

Marcus Becker () and Andreas Löffler ()
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Marcus Becker: ISM International School of Management
Andreas Löffler: Freie Universität Berlin

Review of Managerial Science, 2024, vol. 18, issue 12, No 2, 3487-3514

Abstract: Abstract Incorporating a progressive income tax into an economic decision problem raises the question whether this tax does not create arbitrage opportunities. We investigate this problem in a riskless (multi-period) economy. With a convex tax function we identify a particular kind of arbitrage (called bounded arbitrage): In this case the gain achievable through arbitrage trade is limited and cannot reach infinity.We are able to give a complete characterisation based on prizes of the traded assets as to whether bounded as well as unbounded arbitrage opportunities will exist.

Keywords: No-arbitrage with taxation; Fundamental theorem of asset pricing; Non-constant tax rates; Application of convex optimization problems (search for similar items in EconPapers)
JEL-codes: C61 E62 G12 H24 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s11846-023-00721-1

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