Tax Avoidance, Welfare Transfers, and Asset Prices

Denis Gorea

No 1054, 2013 Meeting Papers from Society for Economic Dynamics

Abstract: Does tax avoidance have any implications for financial markets? This paper quantifies the general equilibrium implications of tax avoidance by setting up an incomplete markets production economy model in which households pay capital gains taxes and have access to tax avoidance technologies provided by financial institutions. I find that changes in the level of tax avoidance have disproportionate effects on different groups of agents and generally benefit the old, wealthy and high income households and detrimental for young, poor and low income households. Furthermore, these changes have asset pricing implications primarily due to the distortion in the optimal portfolio allocation generated by capital gains taxation.

Date: 2013
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