Jonathan Leape

Wealth and portfolio composition: Theory and evidence

In this paper, we examine a new survey of 6,010 U.S.households and estimate a model for the allocation of total net worth among different assets. The paper has three main aims. The first is to investigate the extent to which a conventional portfolio choice model can explain the differences in portfolio composition among households. Our survey data show that most households hold only a subset of the available assets. Hence we analyze a model in which investors choose to hold incomplete portfolios. We show that the empirical specification of the joint discrete and continuous choice that characterizes household portfolio behavior is a switching regressions model with endogenous switching. The second aim is to examine the impact of taxes on portfolio composition. The survey contains a great deal of information on taxable incomes and deductions which enable us to calculate rather precisely the marginal tax rate facing each household.The third aim is to estimate wealth elasticities of demand for a range of assets and liabilities. We test the frequently made assumption of constant relative risk aversion.

Taxes and transaction costs in asset market equilibrium

Abstract This paper examines the effects of capital taxation in an imperfect capital market in which acquiring risky assets incurs costs. Individual portfolio choice has two distinct aspects: the ‘extensive’ choice of which assets to hold in the portfolio and the ‘intensive’ choice of what fraction of wealth to invest in each asset held. The traditional assumption of zero transaction costs obscures the extensive choice. This paper shows that if trading in assets is costly, capital taxes have extensive effects as well as the intensive effects previously studied.

Gaining from Trade in Southern Africa

Over the past three decades, economic growth in most of the countries of Southern Africa has been too slow to generate significant improvements in the standard of living or to lift large fractions of the population out of poverty. Explaining Africa’s poor growth performance and, more generally, the sharp differences in growth performance across countries and regions has been the focus of at least 14 studies in the 1990s. One conclusion to emerge from these studies is that openness to trade is associated with higher rates of economic growth. These findings have reinforced an increasing conviction among policy-makers in Southern Africa that regional trade liberalisation is an important step in efforts to improve growth performance throughout the region.

Taxation and Fiscal Adjustment

The higher levels of investment and growth stimulated by the proposed Free Trade Area (FTA) should, in theory, yield fiscal benefits. In practice, however, there may be adverse fiscal effects arising from two different sources. First, the losses in customs revenues due to falling tariffs on intra-regional trade and the effects of trade diversion could, for many countries, outstrip any gains in other tax revenues (arising from increased levels of economic activity generally). Second, the potential gains in tax revenues are unlikely to be fully realised due to institutional weaknesses in regional tax systems. For this reason, the sustainability of the FTA may depend on individual countries, first, adopting appropriate fiscal measures to offset any losses in customs revenues and, second, reforming tax structures so as to secure the full fiscal benefits of increased growth in the longer term. Failure to address any revenue shortfalls due to decreases in customs revenue will cause a deterioration of countries’ macroeconomic positions, which, as discussed in Chapter 2, are already fragile in a number of member countries. Failure to address the structural issues risks undermining the potential benefits of the FTA.

Tax policies in the 1980s and 1990s: the case of the United Kingdom

The election of a Conservative government under Margaret Thatcher in 1979 marked a turning point in UK tax policy. In the 1960s and 1970s, the primary focus of fiscal policy was on macroeconomic objectives, with demand management a central concern. With regard to microeconomic objectives, two areas received particular attention. One was rectifying market distortions: the perceived failure of firms to devote sufficient resources to long-term capital investment led to a variety of measures including investment grants and accelerated depreciation provisions while favourable tax treatment for pensions and life assurance was justified by the failure of individuals to provide for their retirement. Another was redistribution: the tax system was felt to be crucial in reducing inequalities.