Abstract
This paper extends the martingale analysis of no arbitrage pricing to worlds with taxation. The absence of arbitrage is shown to imply the existence of different shadow prices for income streams that are subject to differing tax treatments. For example , no arbitrage implies the existence of different martingale measures for capita l gains and for ordinary income when they are differentially taxed, andfor item s such as depreciation expenses that influence only after- tax cash flows. The analysis is applied to several topics in finance including the debt/equity decision, tax options, and the taxation of dividends and pensions. Copyright 1987 by University of Chicago Press.
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