Taxation and Investment Risk Question likely, following, investment, government, Investment

cjs238

Which of the following moves by a government would most likely lead to the government taking on more investment risk?
A) Moving from a heavy dividend tax regime to a common progressive tax regime.
B) Moving from a common progressive tax regime to a heavy dividend tax regime.
C) Tax regimes cannot shift investment risk.

bodhisattva

Hrm, that makes sense. I definitely over thought that one.

I went with A. Lowering tax rates on dividends would cause more money to go into equity causing an aggregate increase in investment risk.

Should have thought from a micro sense.

Thanks.

ll11

B

Investor risk is SD*(1-T), so government share is SD*T. To increase government risk, raise taxes or increase risk in the portfolio.

NO EXCUSES

nannan66

How do we know a heavy dividend tax system will have a higher tax rate applied to the SD? What am I missing?

edit: meant heavy dividend system...question still stands



Edited 2 time(s). Last edit at Monday, May 23, 2011 at 12:27PM by abushey31.

aidebaobao

abushey31 Wrote:
-------------------------------------------------------
> How do we know a common progressive tax system
> will have a higher tax rate applied to the SD?
> What am I missing?


Compared to a heavy dividend tax regime, it doesn't.

NO EXCUSES

zwjy

Very interesting. Thought of A as well.