Risky Assets and the Choice of Tax Base

Abstract

Using a two-period model in which income is earned in the first period and saving can be invested in a risky asset, the authors explore the implications of the wealth tax and the consumption tax approaches for both the government and the wage earner. Settings under which decisions are made through Marshallian utility functions and settings under which decisions are made through von Neumann-Morgenstern risk preference functions are clarified. This is an issue that has suffered from benign neglect in this literature. It is shown that the implications of uncertainty for tax policy are much greater than has hitherto been implied.