Capital Income Taxation and Risk Taking under Prospect Theory

Jaroslava Hlouskova and Panagiotis Tsigaris ()

No 283, Economics Series from Institute for Advanced Studies

Abstract: This research examines capital income taxation for a loss averse investor under some acceptable in the literature reference levels relative to which are the changes in the level of wealth valued. Depending on the reference level, some results indicate that it could be possible for a capital income tax increase not to stimulate risk taking even if the tax code provides the attractive full loss offset provisions. However, risk taking can be stimulated if the investor interprets part of the tax as a loss instead as a reduced gain. Then investor becomes risk seeking and moves away from the discomfort zone of relative losses. This later response to taxation causes private risk taking to increase which is contrary to what evolves from assuming an expected utility model. Finally, a number of other reference standards are examined as well.

Keywords: Risk taking; Portfolio choice; Prospect theory; Loss aversion; Reference level; Taxation (search for similar items in EconPapers)
JEL-codes: G11 H2 (search for similar items in EconPapers)
Pages: 21 pages
Date: 2012-02
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (14)

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https://irihs.ihs.ac.at/id/eprint/2113 First version, 2012 (application/pdf)

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Journal Article: Capital income taxation and risk taking under prospect theory (2012)
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