Differential income taxation and household asset allocation

Richard Ochmann

Applied Economics, 2014, vol. 46, issue 8, 880-894

Abstract: This article empirically investigates the effects of differential income taxation on households' portfolio choice and asset allocation, applying a two-stage budgeting model of asset demand to German survey data. The model is structured into the discrete and the continuous asset choice. Cross-sectional variation in marginal tax rates, appropriately instrumented, as well as over-time variation from a major tax reform are used to identify the tax effects. Households with higher tax rates are found to have relatively greater demand for tax-privileged assets, such as nonowner-occupied housing, mortgage repayments, building society deposits, stocks, insurances and consumer credits, than households with lower tax rates. Demand at higher tax rates is lower for owner-occupied housing, bank deposits and bonds.

Date: 2014
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Working Paper: Differential Income Taxation and Household Asset Allocation (2010)
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DOI: 10.1080/00036846.2013.859381

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