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Arbitrage and non-linear taxes

Author

Listed:
  • Marcus Becker

    (ISM International School of Management)

  • Andreas Löffler

    (Freie Universität Berlin)

Abstract

Incorporating a progressive income tax into an economic decision problem raises the question whether this tax does not create arbitrage opportunities. We investigate this problem in a riskless (multi-period) economy. With a convex tax function we identify a particular kind of arbitrage (called bounded arbitrage): In this case the gain achievable through arbitrage trade is limited and cannot reach infinity.We are able to give a complete characterisation based on prizes of the traded assets as to whether bounded as well as unbounded arbitrage opportunities will exist.

Suggested Citation

  • Marcus Becker & Andreas Löffler, 2024. "Arbitrage and non-linear taxes," Review of Managerial Science, Springer, vol. 18(12), pages 3487-3514, December.
    • Handle: RePEc:spr:rvmgts:v:18:y:2024:i:12:d:10.1007_s11846-023-00721-1
    DOI: 10.1007/s11846-023-00721-1
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    More about this item

    Keywords

    No-arbitrage with taxation; Fundamental theorem of asset pricing; Non-constant tax rates; Application of convex optimization problems;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies

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