2015-01: Hedging Against Tax Rate Uncertainty: Tax Rate Swaps

Tax rates on personal, corporate and investment incomes have varied significantly throughout U.S. history. Although the current tax rates are the lowest in postwar U.S. history, the current political and economic environment, combined with the borrowing constraints that the U.S. government is implicitly facing, make the long-term sustainability of current tax rates highly doubtful, thus creating significant tax rate uncertainty. Individuals, corporations and investors worldwide are constantly looking for ways to reduce the risk of excessive taxation. This paper designs tax rate swaps to hedge against this tax rate uncertainty.