Updated: Aug 30, 2019
Little is known about how the risk of unexpected changes in tax policy is priced in financial markets. We develop a novel market-based measure of tax risk and quantify how tax risk is priced in asset returns.
Investors periodically face a significant amount of uncertainty regarding how their investment income will be taxed, as tax policy changes over time.
For example, the U.S. government introduced federal income taxes in 1861, but repealed them in 1872, then re-instated them in 1894, and finally deemed them unconstitutional in 1895.