Differential Capital Taxation and Risk Premia: A Separation Result

Francesco Menoncin and Paolo Panteghini

No 12640, CESifo Working Paper Series from CESifo

Abstract: The article studies differential capital taxation — distinct rates on interest income and risky profits — in a continuous-time representative-agent general equilibrium model with complete markets. It derives closed-form expressions for the equilibrium risk-free rate and the market price of risk. A sharp and non-trivial separation result emerges: although interest-income taxation enters the agent's wealth dynamics and could in principle affect portfolio choice, it leaves equilibrium risk premia entirely unchanged. In contrast, profit taxation generally affects both equilibrium prices, except under CRRA preferences.

Keywords: capital income taxation; interest-income tax; market price of risk; general equilibrium; neutrality (search for similar items in EconPapers)
JEL-codes: E44 G12 H24 H25 (search for similar items in EconPapers)
Date: 2026
New Economics Papers: this item is included in nep-dge
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_12640

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