Taxation and Investment Risk Question

Which of the following moves by a government would most likely lead to the government taking on more investment risk? A) Moving from a heavy dividend tax regime to a common progressive tax regime. B) Moving from a common progressive tax regime to a heavy dividend tax regime. C) Tax regimes cannot shift investment risk.

B - with a heavy dividend tax regime, taxes will be paid throughout the investment horizon, which means the government will bear part of the investment risk.

Got to be B

Hrm, that makes sense. I definitely over thought that one. I went with A. Lowering tax rates on dividends would cause more money to go into equity causing an aggregate increase in investment risk. Should have thought from a micro sense. Thanks.

B Investor risk is SD*(1-T), so government share is SD*T. To increase government risk, raise taxes or increase risk in the portfolio.

How do we know a heavy dividend tax system will have a higher tax rate applied to the SD? What am I missing? edit: meant heavy dividend system…question still stands

abushey31 Wrote: ------------------------------------------------------- > How do we know a common progressive tax system > will have a higher tax rate applied to the SD? > What am I missing? Compared to a heavy dividend tax regime, it doesn’t.

Very interesting. Thought of A as well.

B heavy dividend tax regime means it should aviod high dividend stock now (value) stock and focus on growth stock , which adds investment risk

B