Sunday, July 18, 2004

Lawrence Zelenak (Duke) presented The Income Tax and the Equity Risk Premium at the Critical Tax Conference at Rutgers-Newark. Here is a taste of the Introduction:

This paper examines the theoretical and practical arguments against the taxation of the risk premium. It considers whether risk premium should be taxed in an ideal world, whether it can be taxed in a non-arbitrary manner by an administrable income tax, and whether it could and should be taxed by some regime separate from the income tax. The paper reaches no definitive policy conclusions; its goal is not so much to dispel confusion as to engender confusion on a higher level and about more important things. With those disclaimers, however, two main points will emerge.

The first point is that the most promising route to a principled income tax burden on risk premium is via progressive marginal rates….The second point which emerges from the paper is that it may be worth considering–as a response to the difficulty of tax risk premium under an income tax–the possibility of taxing risk premium outside the confines of the income tax