This paper studies equilibrium comparative statics of Financial Markets (FM) equilibria in the ﬁnite horizon General Equilibrium with Incomplete Markets (GEI) model with respect to changes in stochastic tax rates imposed on agents’ endowments and dividends. We show that under reasonable assumptions, without assuming CRRA and identical agents, an increase in the current dividend tax rate unambiguously reduces current asset prices. The paper also ﬁnds that there exists a bound B such that for a coeﬃcient of relative risk aversion less than B, an increase in a future dividend tax rate reduces current price of tradable assets. At the same time, for a coeﬃcient of relative risk aversion greater than B, an increase in a future dividend tax rate boosts the current price of tradable assets. Finally, for a coeﬃcient of relative risk aversion equal to B, an increase in a future dividend tax rate leaves current price of tradable assets unchanged. As a special case, under additional assumptions, B is equal to 1. Also, under reasonable assumptions, an increase in the current endowment tax rate reduces current asset prices, while an increase in a future endowment tax rate boosts current asset prices.
April 21, 2017
2017 Working Papers
Revised from the Center for Risk Management Research Working Paper 2016-03