TAXATION AND RISK-TAKING - A GENERAL EQUILIBRIUM PERSPECTIVE

Taxation and risk taking are examined in a general equilibrium model that incorporates uncertain government revenue and allows the government to influence risk through portfolio investments as well as through tax policy. It is demonstrated that each of a wide range of taxes can be decomposed into some combination of a wage tax, an ex ante wealth tax, and a modification of the government's investment portfolio. For example, with an adjustment in the government's portfolio, an income tax is equivalent to a wage tax plus an ex ante wealth tax (or, alternatively, a tax on riskless return)-taxes that absorb no investment risk and yield certain revenue.