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Taxation, Risk, And Portfolio Choice: The Treatment Of Returns To Risk Under A Normative Income Tax, John R. Brooks

Georgetown Law Faculty Publications and Other Works

Many articles in the legal and economic literature claim that a pure Haig-Simons income tax cannot effectively tax investment income. This is because an investor can use leverage to gross up her investments in risky assets such that the increased gain (or loss) exactly offsets any income tax (or deduction) on the returns to risk-taking. This article argues, however, that while it is possible for an investor to make such portfolio shifts, she almost certainly will not because of the increased risk of doing so.

Central to any discussion of the effects of taxation on investment risk-taking is the meaning …