[In recent decades U.S. households have experienced residential house prices moving persistently, that is, returns being positively serially correlated. We set up a realistically calibrated life cycle model with slow-moving time variation in expected housing returns, showing that not only age, labor income, and pre-existing housing wealth but also the state of the housing market significantly affect household decisions. Consistently with the data, the model predicts that in good states of housing market cycles (1) homeownership rates increase, (2) households buying homes invest a larger share of their net worth in their home, and (3) these households lever up more.]

We study the impact of the different tax treatment of capital gains and losses on the optimal location of assets in taxable and tax-deferred accounts. The classical result of Black (1980) and Tepper (1981) suggests that investors should follow a strict pecking order asset location rule and hold those assets that are subject to the highest tax rate preferentially in tax-deferred accounts. We show that with the different tax treatment of realized gains and losses, only tax-efficient equity mutual funds are optimally held in taxable accounts, whereas mutual funds with average tax-(in)efficiency are preferentially held in tax-deferred accounts.

We study the out-of-sample performance of portfolio trading strategies used when an investor faces capital gain taxation and proportional transaction costs. Overlaying simple tax trading heuristics on trading strategies improves out-of-sample performance. For medium to large transaction costs, no trading strategy can outperform a 1/N trading strategy augmented with a tax heuristic, not even the most tax and transaction cost-efficient buy-and-hold strategy. Overall, the best strategy is 1/N augmented with a heuristic that allows for a fixed deviation in absolute portfolio weights. Our results thus show that the best trading strategies balance diversification considerations and tax considerations.

During the last decades households in the U.S. have experienced that residential house prices move in a persistent manner, i.e. that returns are positively serially correlated. Since an owner-occupied home is usually the largest investment of a household it is important to understand how households act when they base their consumption and investment decisions on this experience. We show in a setting with housing market cycles and households who can decide whether they rent or own the home, that -besides the consumption and the precautionary savings motive -serial correlation in house prices generates a new speculative motive for homeownership. In particular, we show how good and bad housing market cycles affect homeownership rates, leverage, stock investments and consumption and can explain empirically observed household behavior during housing market boom and bust periods.

This article studies the impact of a redistributive tax system on consumption, portfolio decisions, and asset prices in a dynamic general equilibrium model. Poorer agents, which receive more in transfers than they pay in taxes, optimally reduce their exposure to equity, because the transfer income they receive is subject to stock market risk. This article thus provides a novel explanation for the low stock market participation rates of poorer investors.

We study the general equilibrium implications of the corporate tax shield in a growth economy that taxes household income and firm profits and redistributes tax revenues. Our stylized model predicts that in general equilibrium the tax shield's reduction of the corporate after-tax borrowing rate is counteracted (but not fully eliminated) by an increase in the pre-tax rate.

We study the general-equilibrium effects of the corporate debt tax shield in an endowment economy with a redistributive tax system that taxes firm profits and household income and redistributes tax revenues in an attempt to harmonize households’ lifetime consumption opportunities. In general equilibrium, the debt tax shield not only affects corporate capital structure and valuation but also causes poorer households to consume more and save less at a younger age. Without the debt tax shield, the same welfare improvements for poorer households are achievable with significantly lower tax rates.

Property taxes are commonly levied as a percentage of a home’s assessed value (AV). AVs should affect home prices through opposing channels. An unexpected increase in AV implies higher tax payments, which should hurt a home’s selling price (tax channel). On the other hand, the increase should have a positive effect since AVs serve as reference prices (anchoring channel). In a quasi-experimental setting exploiting geographic variations in AV-publication dates and reassessment frequencies, we find that a higher AV leads to a lower transaction price, indicating that the tax channel prevails. Disentangling the aggregate effect, we document that empirically, the anchoring channel does not play a major role. Our results thus suggest an exacerbation of previously documented inequities caused by taxation.