Both authors from Graduate School of Industrial Administration, Carnegie-Mellon University. We wish to thank Scott Richard, Steven Spear, and an anonymous referee for helping us sort through the issues considered here. Seminar participants at Columbia, Wharton, the Johnson Symposium on Asset Pricing at the University of Wisconsin-Madison, and the 1986 Western Finance Association Meeting also provided valuable comments. We are also grateful for the financial support provided by the Center for Public Policy Research, Carnegie-Mellon University. All errors are our own responsibility.
Tax Arbitrage and the Existence of Equilibrium Prices for Financial Assets
Article first published online: 30 APR 2012
1987 The American Finance Association
The Journal of Finance
Volume 42, Issue 5, pages 1143–1166, December 1987
How to Cite
DAMMON, R. M. and GREEN, R. C. (1987), Tax Arbitrage and the Existence of Equilibrium Prices for Financial Assets. The Journal of Finance, 42: 1143–1166. doi: 10.1111/j.1540-6261.1987.tb04358.x
- Issue published online: 30 APR 2012
- Article first published online: 30 APR 2012
In models where both investors and securities are subject to differential taxation, there may be no set of prices that rule out infinite gains to trade, or “tax arbitrage.” This paper characterizes the joint restrictions on financial-asset returns and investors' tax schedules that preclude tax arbitrage in the absence of short-sale constraints. The authors show that, if there exists any configuration of marginal tax rates on investors' tax schedules that rule out infinite gains to trade, then “no-tax-arbitrage” prices will exist. They also show that the existence of “no-tax-arbitrage” prices ensures the existence of equilibrium prices.