A Utility-Based Explanation of Tax Asymmetries

Abstract

This paper develops a utility-based explanation for the existence of an asymmetric tax treatment of gains and losses when investors are loss averse. We find that loss offset rules should be more restrictive for investors which are (1) more risk averse in case of gains, (2) less risk seeking in case of losses, or (3) more loss averse. Our findings have important policy implications. Tax authorities often implement identical loss offset rules for different investor clienteles. However, when designing loss offset rules, tax authorities should take into account the substantial heterogeneity in risk attitude and loss aversion across different groups of investors.

Keywords: Asymmetric Taxation, Loss Offset Rules, Loss Aversion

JEL Classification: H24, H25, H30