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Explain why a decrease in income taxes would not necessarily increase the riskiness of investments people...

Explain why a decrease in income taxes would not necessarily increase the riskiness of investments people are willing to undertake.

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Answer #1

A decrease in income taxes would not necessarily increase the riskiness of investments people are willing to undertake because riskiness of an individual is determined by the utility function of the individual. If it is concave then the person is risk averse and if a person a risk loving, then the utility function is convex. Income tax has little role to play in determining the shape of the utility function.

Thus, a decrease in income taxes would not necessarily increase the riskiness of investments people are willing to undertake.

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