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- Title
Portfolio Optimization Subject to Tax Bracket Constraints: A Linear Programming Approach.
- Authors
Fisher, Dann G.; O'Bryan, David; Schmidt, Tom; Parker, James E.
- Abstract
Conventional investment and tax-planning wisdom holds that the marginal tax rate is the critical variable in planning for the next dollar of taxable investment. The traditional approach to maximize after-tax returns is to invest incremental investment dollars in the asset yielding the highest after-tax return. In this paper we develop and implement a linear programming model to serve as an alternative to traditional analysis. Given a regime characterized by progressive tax rates, we argue that as an investor's taxable income exceeds the upper boundary of a tax bracket, optimal strategy results from a comparison of the after-tax return from an intra-bracket investment shift relative to the after-tax return from the traditional, or inter-bracket, approach. Our analysis suggests that tax planners may wish to jointly consider intra-bracket and inter-bracket allocations of investment dollars.
- Subjects
LINEAR programming; INVESTMENTS; TAX rates; TAX returns; INCOME tax; TAX planning
- Publication
Journal of the American Taxation Association, 1992, Vol 14, Issue 2, p112
- ISSN
0198-9073
- Publication type
Article