Impact of Taxes and Human Capital on Private Client Portfolio Management - Essay Example

Private clients in portfolio management tend to base their decisions on the overall tax burden, which creates a disincentive to engage in activities taxed at a higher rate (Parkin 56). Tax based income policies are policies that control inflation like the rate of increases in wages and the associated increase in prices through tax penalties and incentives. One of the main objectives of portfolio is to earn returns on the individual’s investment. Others include accumulation and preservation of capital.

Tax policies and systems are potentially essential factors that determine private portfolio management because they too determine individual’s portfolio choices. These choices include the decision on whether to hold stocks, how much should be invested, and the period of time to be spent on speculation before the clients sell their securities. Moreover, different states offer different tax levels for the various available portfolio assets as well as incentives to encourage investment. Moreover, the tax policies and systems have significant effects on the number of private clients who will exploit the available investment opportunities.

In addition, most of the countries embrace a tax system that treats all investors equally and offer private client’s incentives to stimulate their investments. Therefore, taxation has a significant effect on portfolio structure. There is clear evidence from research on how portfolios are greatly affected by tax rules. Similarly, evidence shows that human capital and other related tax policies and systems that the tendency of people to invest in portfolios depends on the investor’s perception on the tax-induced rewards, which are gained from investments.

Whenever taxes increase in an economy, private clients become reluctant in investing because it becomes very hard to carry out any trade in a given location and therefore private investors tend to move to better places. Likewise, private clients have a tendency of fearing direct investment in portfolios when substantial taxes are imposed by the government in order to reduce their expenses. Moreover, investors are quite sensitive to any increase or decrease in the marginal tax rates since this determines whether they will invest in portfolios or not.

Introduction of transaction taxes by a government on trades and available investment opportunities has the ability to change the location of investors. Another implication of human capital on private client’s portfolio is that adjustments in the supply of capital to these households are costly especially due to the opportunity costs forgone. Therefore, a private client is more willing to invest in portfolios when there his or her human capital has a high rate of return or when there is maximum productivity on the invested capital.

Therefore, availability and existence of human capital increases the rate of investment into portfolios as opposed to incidences when the households lack human capital. Recently, human capital has been highly debated and discussed by scholars due to its significance in portfolio choice. Furthermore, introduction of methods of control by the government also affects private clients indirectly since an increase in the tax rate on investments results into a decrease in the potential private investors.

In fact, a significant reduction on taxes or