Munich Personal RePEc Archive

Proportional Tax under Ambiguity

Dong, Xueqi and Liu, Shuo Li (2021): Proportional Tax under Ambiguity.

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Abstract

This paper studies how investment can be influenced by common tax and monetary policies, where investment is measured by the proportion of an investor’ wealth invested in the asset that pays a random return. We further prove that all risk- uncertainty averse individuals will increase investments if and only if a type of proportional tax with full loss offset (Domar and Musgrave 1944, QJE) is imposed. This result holds: 1. under ambiguity, that is when the probability distribution of an as- set’s return is unknown; 2. when borrowing in the safe asset is allowed.

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