Asset Location in Tax-Deferred and Conventional Savings Accounts

The optimal allocation of assets among different asset classes (such as stocks and bonds) has received considerable attention in financial theory and practice. On the other hand, investors have not been given much guidance about which assets should be located in tax-deferred retirement accounts and which in conventional savings accounts. This paper derives optimal asset allocations (which assets to hold) and asset locations (where to hold them) for a risk-averse investor saving for retirement. Locating assets optimally can significantly improve the risk-adjusted performance of retirement savings.

Capping the Mortgage Interest Deduction

In this paper we examine the economic implications of several policy options for capping the mortgage interest deduction (MID). We extend the standard user–cost model of owner–occupied housing to include a cap on the mortgage size receiving tax–favored status. Our user–cost estimates for taxpayers with mortgages above the current–law cap are 4.41 percent higher than estimates from a model without the cap. We simulate the share of mortgage dollars that would be subject to three alternative cap policy variants and summarize the distributional impacts of each proposal, computing the share of mortgage dollars impacted across U.S. Metropolitan Areas

International linkages in the term structure of interest rates

Interest rates ; Banks and banking, International

Essential countability of treeable equivalence relations

We establish a dichotomy theorem characterizing the circumstances under which a treeable Borel equivalence relation E is essentially countable. Under additional topological assumptions on the treeing, we in fact show that E is essentially countable if and only if there is no continuous embedding of E1 into E. Our techniques also yield the first classical proof of the analogous result for hypersmooth equivalence relations, and allow us to show that up to continuous Kakutani embeddability, there is a minimum Borel function which is not essentially countable-to-one

Tax Externalities of Equity Mutual Funds

Investors holding mutual funds in taxable accounts face a classic externality. The after-tax return of their investment depends on the behavior of others. In particular, redemptions may force the mutual fund to sell some of its equity positions in order to pay off the liquidating investors. As a result, it may be forced to distribute taxable capital gains to its shareholders. On the other hand, new investors convey a positive externality upon existing investors by diluting the unrealized capital gain position of the fund. This paper's simulations show that these externalities are important determinants of the after-tax performance of equity mutual funds.

Granite : a planetary response to liquid water

Inaugural lecture delivered at Stellenbosch University on 7 October 2008.Granites are coarse-grained igneous rocks, rich in quartz and feldspars and containing one or more hydrous minerals, such as micas and amphiboles. They have crystallised from silica-rich magmas that contained significant amounts of dissolved H2O. Most such magmas are created when the pressures and temperatures, in hydrated rocks deep in the planet’s crust, exceed those of the solidus, producing melt and crystalline residue. During this process H2O need not be present in a free fluid, but the planet’s near-surface environments do need to have abundant liquid water to produce weathered and hydrated rocks that ultimately melt to make the magmas. Liquid water in sufficient amounts (oceans) to trigger the chain of processes that leads to the formation of granites occurs on only one terrestrial planet, namely Earth. This explains why only Earth of all the planets in the solar system has plate tectonics, granites, continents and terrestrial life

Asset Location for Retirement Savers

This paper uses data on actual returns on taxable bonds, tax-exempt bonds, and a small sample of equity mutual funds over the 1962-1998 period to compare two asset location strategies for retirement savers. The first strategy gives priority to holding equities, through equity mutual funds, in a saver's tax-deferred account, while the second strategy gives priority to holding fixed-income investments in the tax-deferred account. We consider high-income taxable individual investors who saved in each year and invested in one of actively-managed funds in our sample. Over the thirty-seven year span that we consider, such savers would have accumulated a larger stock of wealth if they had held their equity mutual fund in their tax-deferred account than if they had held the fund in a conventional taxable form. The explanation for this apparent contradiction of the often-stated bonds in the tax-deferred account' prescription has two parts. First, many equity mutual funds impose substantial tax burdens on their investors. This raises the effective tax rate on investing in equities through mutual funds rather than in a buy-and-hold personal portfolio. Second, taxable investors who wish to hold fixed income assets can do so by holding tax-exempt bonds as well as by holding taxable bonds. The interest rate differential between taxable and tax-exempt bonds suggests that the effective tax rate on fixed income investments may be lower than the statutory tax rate for high-income investors.