Law Commons^™

Income Taxation, Wealth Effects, And Uncertainty: Portfolio Adjustments With Isoelastic Utility And Discrete Probability, Theodore S. Sims

Faculty Scholarship

The expected utility formulation of the problem of a risk-averse agent’s allocating a portfolio between a safe and a risky asset is widely taken as standing for the proposition that if α* ε (0, 1) is the optimal allocation to the risky asset in the absence of tax, α*/(1-t) is the optimal allocation in the presence of tax at rate t, a finding obtained on the assumption that the return r to the riskless asset is (or is taxed as though it were) zero. In this paper I model the agent as exhibiting constant relative risk aversion and the probability …