Asset Demand in the Financial AIDS Portfolio Model: Evidence from a Major Tax Reform

Abstract

In this article, new evidence from the financial Almost Ideal Demand Sysytem (AIDS) portfolio model is featured, making use of additional exogenous rate-of-return variation, which has been mostly disregarded in the relevant literature so far. A Two-Stage Budgeting Model (2SBM) of asset demand is constructed and applied to German survey data for a time frame where first implementations of a major income tax reform in Germany significantly altered the tax schedule. Marginal Tax Rates (MTR) at the household level are simulated in an income taxation module. Relatively great rate-of-return elasticities for, among others, owner-occupied housing as well as capital and private pension insurances suggest that return-related reactions are stronger at the asset allocation decision than they are usually found for the consumption-savings decision.