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Retrospective Capital Gains Taxation in the Real World

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Author Info
Francesco Menoncin ()
Paolo Panteghini ()

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Abstract

In this article, we analyze Auerbach's (1991) proposal of a retrospective capital gains tax, which is equivalent to an accrual tax on an ex-ante basis. Using a continuous-time model with stochastic interest rates, we prove that equivalence holds even if the risk-free asset return is correlated with other risky assets' returns. However, equivalence fails to hold on an ex-post basis. In other words, if an investor faces a huge gain (loss), the effective tax rate under this system is less (higher) than that what would be due under an accrual tax system. This leads to a fairness problem. For this reason, we also find the conditions that ensure equivalence on an ex-post basis. As will be shown, however, ex-post equivalence can be achieved only if a huge amount of information is available, making its implementation a hard task.

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Publisher Info
Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number CESifo Working Paper No. 2674.

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Date of creation: 2009
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Handle: RePEc:ces:ceswps:_2674

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Related research
Keywords: capital gains; risk; taxation;

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Find related papers by JEL classification:
H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm

References listed on IDEAS
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  1. Constantinides, George M, 1983. "Capital Market Equilibrium with Personal Tax," Econometrica, Econometric Society, vol. 51(3), pages 611-36, May. [Downloadable!] (restricted)
  2. Merton, Robert C, 1973. "An Intertemporal Capital Asset Pricing Model," Econometrica, Econometric Society, vol. 41(5), pages 867-87, September. [Downloadable!] (restricted)
  3. Alan J. Auerbach, 1991. "Retrospective Capital Gains Taxation," NBER Working Papers 2792, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  4. Auerbach, Alan J. & Bradford, David F., 2004. "Generalized cash-flow taxation," Journal of Public Economics, Elsevier, vol. 88(5), pages 957-980, April. [Downloadable!] (restricted)
    Other versions:
  5. Shiller, Robert J. & Beltratti, Andrea E., 1992. "Stock prices and bond yields : Can their comovements be explained in terms of present value models?," Journal of Monetary Economics, Elsevier, vol. 30(1), pages 25-46, October. [Downloadable!] (restricted)
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  6. Vasicek, Oldrich Alfons, 2005. "The economics of interest rates," Journal of Financial Economics, Elsevier, vol. 76(2), pages 293-307, May. [Downloadable!] (restricted)
  7. Eugene F. Fama & Kenneth R. French, 2004. "The Capital Asset Pricing Model: Theory and Evidence," Journal of Economic Perspectives, American Economic Association, vol. 18(3), pages 25-46, Summer. [Downloadable!] (restricted)
  8. Zhu, Xiaodong, 1992. "Optimal fiscal policy in a stochastic growth model," Journal of Economic Theory, Elsevier, vol. 58(2), pages 250-289, December. [Downloadable!] (restricted)
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