PREFERENTIAL TAXATION AND PORTFOLIO CHOICE: SOME EMPIRICAL EVIDENCE

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Abstract
Economic theory suggests that assets which receive preferential income tax treatment should be held predominately by taxpayers in higher marginal tax brackets. This paper uses a simple threeasset model to demonstrate how profit maximizing portfolio decisions would lead to this result It then proceeds to test this proposition by using a specialized data set on unincorporated business income developed at the U.S. Treasury. The data set was used to array the income flows from investment in selected industries by the marginal tax rates of the investors. These arrays indicate that income flows from those industries which are most preferentially taxed accrue disproportionately to the highest marginal tax bracket investors, results consistent with economic theory.

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