Paul L. Caron

Friday, November 12, 2021

Brennan Presents The Tax Portfolio Today At Boston College

Tom Brennan (Harvard) presents The Tax Portfolio at Boston College today as part of its Tax Policy Collaborative hosted by Jim Repetti, Diane Ring, and Shu Yi Oei: 

Brennan (2017)This paper demonstrates that a linear tax on capital is equivalent to one that imposes an ex ante lump-sum payment on a taxpayer’s position with respect to a particular asset portfolio, referred to herein as the “tax portfolio,” and no tax on any portfolio orthogonal to it. Among the orthogonal portfolios, there may or may not be a portfolio with a non-zero (pre-tax) market price. If there is not such a portfolio, then the tax is equivalent to an ex ante wealth tax, and the result is the same as found by Kaplow (1994). If, however, there is an orthogonal portfolio with non-zero price, then the tax portfolio may be chosen to have zero market price, and there exists an “untaxed capital portfolio” that is effectively not subject to tax and that has non-zero market price. In this case, the tax burden is separated from the total amount of capital invested. A taxpayer has flexibility to allocate capital to the untaxed capital portfolio and thereby avoid any tax burden. Only an investment in the tax portfolio results in a tax burden, with a short position in the portfolio resulting in an effective tax subsidy.

A tax that imposes different rates on different investments generally gives rise to the latter situation in which wealth is not effectively taxed. This is the case for differential tax rates on ordinary and capital income, differential effective rates depending upon the length of savings, and differential effective rates applicable in different future states of the world.

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