Abstract This paper examines the effect of tax rate uncertainty on security prices, investor clienteles, and tax revenue. A laboratory market selling is employed where differentially taxed investors invest in three differentially taxed riskless securities (fully taxable, partially taxable, and non-taxable). The setting is replicated under conditions of investor tax rate certainty and uncertainty. When tax rates are certain, prices reflect security tax differences and clienteles develop such that investors minimize their total (explicit plus implicit) tax burden. Tax rate uncertainty leads to decreased prices, hence increased returns, for the fully and partially taxable securities as investors demand a premium to hold these "risky" taxable securities. Tax uncertainty also impedes investor clientele formation and results in increased expected tax payments by investors.
Collins et al. (Wed,) studied this question.