Taxation and Risk Taking: a General Equilibrium Perspective

Taxation and risk taking are examined in a general equilibrium mode/ that incorporates uncertain government revenue and allows the government to influence risk through portfolio investments as well as through tax r policy. It is demonstra ted that each of a wide range of taxes can be decomposed into some combina tion of a wage tax, an ex ante wealth tax, and a modification of the government’s investment portfolio. For example, with an adjustment in the government’s portfolio, an income tax is equivalent to a wage tax plus an ex ante wealth tax (or, alternatively, a tax on riskless return)-taxes that absorb no investment risk and yield certain revenue.