Title
Asset Prices, Wealth Inequality, and Taxation
Abstract
We investigate the interplay between asset prices, wealth inequality, and taxation in a dynamic general equilibrium economy populated by multiple agents with heterogeneous risk aversions. Tax revenues are collected from consumption taxes and are equally redistributed to all investors through non-pledgeable government transfers. Taxes address wealth inequality by ensuring stationarity of consumption share distributions and preventing consumption shares of less affluent investors from diminishing toward zero. Higher taxes increase stock risk premia and volatilities by shifting wealth toward poorer risk-averse investors, and tend to decrease stock price-dividend ratios and interest rates. The rise in risk premia and decrease in interest rates benefit more affluent, less risk-averse investors, partially offsetting the impact of higher taxes on their wealth, albeit to a small extent. We find that taxes do not prevent high concentrations of wealth at the top of the wealth distribution due to the investment decisions and tax responses of more affluent investors. We also extend the model to incorporate restricted stock market participation and show that its interplay with taxation increases stock risk premia and volatility, and decreases interest rates.
Bio
Dr. Basak is Professor of Finance at London Business School. He teaches courses in Fixed Income Securities and Financial Engineering & Risk Management. He was an Assistant Professor of Finance at the Wharton School of the University of Pennsylvania, was a visitor at the Graduate School of Business at the University of Chicago and acted as a consultant to Goldman, Sachs & Co. He received his Ph.D. in Financial Economics from Carnegie Mellon University, and holds M.S. degrees in Financial Economics and Civil Engineering from Carnegie Mellon University and a B.Sc.(Eng) in Civil Engineering from University College London.
His main research interests are in the areas of theoretical asset pricing, risk management, market imperfections, international finance and financial innovation. His work has addressed issues related to portfolio insurance, VaR-based risk management, benchmarking, credit risk, tax arbitrage, incentive problems plaguing institutional asset management, and mispricing, arbitrageurs and monopoly power in financial markets.
Dr. Basak serves as a Research Fellow to the Center of Economic Policy Research (CEPR). He is the recipient of several awards including: the American Association of Individual Investors Award for the Best Paper on Investments, the Alexander Henderson Award for Excellence in Economic Theory at Carnegie Mellon University, the Fulbright Scholarship, General Excellence Teaching, Best Teacher MiF and Best Teacher MFA Awards at London Business School, David Hauck Teaching Award at University of Pennsylvania, and Wharton Graduate and Undergraduate Divisions Excellence in Teaching Awards.