Arbitrage and non-linear taxes

• Published in: Review of managerial science Vol. 18; no. 12; pp. 3487 - 3514
• Main Authors: Becker, Marcus, Löffler, Andreas
• Format: Journal Article
• Language: English
• Published: Berlin/Heidelberg Springer Berlin Heidelberg 01-12-2024; Springer Nature B.V
• Subjects: Accounting/Auditing; Arbitrage; Banking; Business and Management; Business Strategy/Leadership; Corporate taxes; Decision making; Income taxes; Interest rates; Investigations; Marketing; Original Paper; Personal income; Prices; Tax base; Tax rates; Taxable income; E62; Non-constant tax rates; No-arbitrage with taxation; G12; Fundamental theorem of asset pricing; H24; Application of convex optimization problems; C61
• ISSN: 1863-6683; 1863-6691
• DOI: 10.1007/s11846-023-00721-1

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.