Risk-taking and taxation

Conclusions This survey has considered the effects of taxation on risk-taking from both a partial and a general equilibrium viewpoint. The most relevant results to emerge at a very general level are that in the former taxation will typically increase risk-taking, while in the latter it is typically better to tax risky industries more heavily than safe; both results are contrary to conventional views.While the work surveyed shows that substantial progress has been made on this question it also shows that there remains much to be done. This seems to fall into three categories. Firstly, the investigation by variational methods of the properties of an optimal (not necessary linear) tax function in a simple model; secondly, the combination of these ideas on the optimal taxation of risky property income with those in the taxation of labor income, and also of expenditures; and finally, the incorporation of risk into all forms of optimal taxation model, not only those explicitly concerned with risky assets. These however are far from simple problems.This paper was presented at the International Economic Association Workshop in Economic Theory, Bergen 1971; I should like to thank the IEA for a stimulating month, and participants for comments, particularly J. A. Mirrlees for suggesting the analysis on page 207f. I am also grateful to A.B.Atkinson for comments.