Can Government Collect Resources without Hurting Investors? Taxation of Returns from Assets

Abstract

This paper presents the possibility that the government may be able to collect resources, without hurting investors, by introducing or changing taxes and subsidies on gains from different classes of financial assets. Our positive analysis is based on heterogeneous investors and an arbitrary number of asset classes. An example of the results, in the simple setting of one risky and one riskless asset, is that, under plausible conditions, the government’s resources increase, without hurting investors, from a small tax on the return from the risky asset and a small subsidy on the riskless return. We describe several more general qualitative conclusions, and the economic forces underlying them.