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Home Bias in Portfolios and Taxation of Asset Income

Author

Listed:
  • Gordon Roger Hall

    (University of California, San Diego)

  • Gaspar Vitor

    (European Central Bank)

Abstract
Intuitively, the observed "home bias" in individual portfolios plausibly explains the international capital immobility reported by Feldstein and Horioka (1980) as well as the survival of taxes on capital income. These intuitions are examined in a model where consumers prefer to consume domestically produced goods. The results show that international capital immobility is indeed present in the model: extra domestic savings generate extra investment primarily in the home country. When monetary policy focuses on exchange rate stabilization random domestic prices cause individuals to heavily invest in domestic equity as a hedge against price fluctuations. However our findings show that the specialization of equity portfolios does not necessarily facilitate the taxation of capital income. While random equity returns do facilitate taxes on equity income, as shown in Gordon and Varian (1989) and Huizinga and Nielsen (1997), random consumer prices appear to undermine taxes on capital income.

Suggested Citation

  • Gordon Roger Hall & Gaspar Vitor, 2001. "Home Bias in Portfolios and Taxation of Asset Income," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 1(1), pages 1-30, September.
    • Handle: RePEc:bpj:bejeap:v:advances.1:y:2001:i:1:n:1
    DOI: 10.2202/1538-0637.1001
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    References listed on IDEAS

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    1. Gordon, Roger H. & Varian, Hal R., 1989. "Taxation of asset income in the presence of a world securities market," Journal of International Economics, Elsevier, vol. 26(3-4), pages 205-226, May.
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    Cited by:

    1. Wagner, W.B., 2002. "Risk sharing under incentive constraints," Other publications TiSEM 1bd8e44d-62a5-4cf7-96b2-f, Tilburg University, School of Economics and Management.
    2. Apergis, Nicholas & Tsoumas, Chris, 2009. "A survey of the Feldstein-Horioka puzzle: What has been done and where we stand," Research in Economics, Elsevier, vol. 63(2), pages 64-76, June.
    3. Fossen, Frank M. & Simmler, Martin, 2016. "Personal Taxation of Capital Income and the Financial Leverage of Firms," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 23(1), pages 48-81.
    4. Gordon, Roger H. & Li, Wei, 2003. "Government as a discriminating monopolist in the financial market: the case of China," Journal of Public Economics, Elsevier, vol. 87(2), pages 283-312, February.
    5. Detken, Carsten & Winkler, Bernhard & Gaspar, Ví­tor, 2004. "On prosperity and posterity: the need for fiscal discipline in a monetary union," Working Paper Series 420, European Central Bank.

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