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Differential income taxation and household asset allocation

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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.
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Keywords: C35; G11; H31; capital income taxation; household asset allocation; portfolio choice; two-stage budgeting

Document Type: Research Article

Affiliations: Department of Public Economics, German Institute for Economic Research (DIW Berlin), 10117, Berlin, Germany

Publication date: 2014-03-14

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