Faculty of Law University of Toronto
The James Hausman Tax Law and Policy Workshop Series
presents
Terrence Chorvat
George Mason University
The Effect of the Taxation of Risky Income on Investment Behavior
Tuesday, September 29, 2008
4:10 – 6:00 p.m.
Solarium (room FA2) – Falconer Hall
84 Queen’s Park
Domar and Musgrave’s article concerning the effects of a full-loss-offset income tax has been a staple of the public finance literature since 1944. Their model of investor behavior with a full-loss-offset income tax predicts that if a variety of conditions are met, investors should shift their portfolios to higher-risk assets since the government is sharing the risk. Their model assumes that taxpayers are capable of calculating their risk preference under a risk-altering tax structure. Despite the model’s prominent role in the literature, the extent to which its predictions match actual economic behavior has yet to be directly empirically examined. In this paper, we use a laboratory experiment to test the hypothesis that individuals are willing to accept more risk when faced with a full-loss-offset income tax. Preliminary data in this experiment indicate that a symmetrical income tax has either no affect on portfolio allocation or might reduce an investor’s willingness to take on risk. These results imply that the model’s predictions may be reliant on unreasonable assumptions of human behavior.
PROFESSOR TERRENCE R. CHORVAT, is an expert in the taxation of business organizations, particularly the taxation of international transactions. He holds an LL.M. in Taxation from New York University, where he served as acting assistant professor for two years. He is a graduate of the University of Chicago School of Law and of Northwestern University. In 1997, he served as a policy advisor to Senator Edward Kennedy. Professor Chorvat has published a number of articles in the tax field, including: "Perception and Income: The Behavioral Economics of the Realization Doctrine" (Connecticut Law Review, forthcoming), "Apologia for the Double Taxation of Corporate Income" (Wake Forest Law Review, 2003), "Ambiguity and Income Taxation" (Cardozo Law Review, 2002), "Ending the Taxation of Foreign Business Income" (Arizona Law Review, 2001), "Taxing International Corporate Income Efficiently" (Tax Law Review, 2000). He has also written in the emerging field of neuroeconomics with Nobel Laureate Vernon Smith and Kevin McCabe, including: "Lessons from Neuroeconomics for the Law" (in The Law and Economics of Irrationality, Vernon Smith and Francesco Parisi eds. 2003) and "Law and Neuroeconomics" (The Supreme Court Economic Review, forthcoming). Prof. Chorvat also has co-authored articles with Michael Knoll of the University of Pennsylvania Law School including: "The Case for Repealing the Corporate Alternative Minimum Tax" (SMU Law Journal, 2003). He teaches courses in Corporate Income Taxation, Partnership Taxation, Taxation of International Transactions, Advanced U.S. International Taxation, International Business Transactions, Tax Planning, Professional Responsibility, and Federal Income Taxation. His article, Apologia for the Double Taxation of Corporate Income was recently presented at the Stanford-Yale Junior Faculty Forum.
