Taxes can affect investment not only through the income and substitution effects related to saving, but also through a risk-taking effect. The capital gains tax rate has been singled out as being important to investment. For risk-averse investors, the capital gains tax could act as insurance for risky investments by reducing the losses as well as the gains—it decreases the variability of investment returns. 27 Consequently, a rise in the capital gains top rate could increase investment because of reduced risk. The bottom charts in Figure 3 show the observed relation between the private fixed investment ratio (investment divided by potential.
