Taxation,incentives, and risk sharing

The tendency for taxation to weaken incentives and induce inefficient behavior on the part of entrepreneurs is demonstrated with a simple example. Next the Mossin model is extended from a proportional to a progressive tax structure that closely approximates the one in place in the U.S.A. It is shown that increased progressivity causes the amount of wealth invested in the risky asset to decline rather than increase as is true with proportional taxes.