Wealth-loss to Investors from Taxation of Investment Returns

Abstract

Since most countries impose significant levels of taxes on the returns from investments, it is important to understand the nature of the burden that such taxation imposes upon investors. This paper derives and analyzes expressions for the tax-burden imposed on an investor in terms of the loss of his initial wealth. These previously-unavailable explicit expressions for the loss are intuitive and informationally highly parsimonious. Surprisingly, the loss does not depend on the nature of the investor's risk aversion, or on any aspect of the risky assets (e.g., the number of these assets, or their distribution of returns). I also show that: (i) any given tax on investment returns is identical in its burden on investors to a proportional tax on their initial wealths, (ii) the latter tax rate depends solely on the former tax rate and the riskless return, and hence (iii) the latter tax rate is the same for all investors regardless of their characteristics and the set of risky assets available to them.