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Does Taxation at the Unit of Household Increase the Demand for Risky Asset?

With the background of a fierce discussion in the tax reform of transforming the current individual income tax system from levying income tax at the unit of individual to the unit of household in China, this paper studies the implications of a tax reform for households’ risky asset share. We observe that (I) levying taxes at the unit of household is helpful for reducing tax burdens, this, in turn, (II) in the short term, increases household disposable income and causes a wealth effect enhancing households enthusiasm to participate in the financial market and to hold a larger proportion of risky assets, (III) in the long term, affected by a crowding out effect caused on by labor income risk, the increase degree of household risky assets share is lower than that in the short term. Moreover, compared with the current tax system, the volatility of household risky asset holdings is smaller than that in the tax system where tax is levied at the unit of household, which benefit for enhancing households’ financial portfolio stability.