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Retrospective Capital Gains Taxation

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  • Auerbach, Alan J

Abstract

This paper presents a new approach to the taxation of capital gains that eliminates the deferral advantage of realization-based systems, along with the lock-in effect and tax-arbitrage possibilities associated with this deferral advantage. The new method still taxes capital gains only upon realization, but effectively by charging interest on past gains when realization finally occurs, eliminates the incentive to defer such realization. Unlike a similar scheme suggested previously by William Vickrey, the present method does not require knowledge of the potentially unobservable pattern of gains over time. It, thus, is applicable to a very broad range of capital assets. Copyright 1991 by American Economic Association.

Suggested Citation

  • Auerbach, Alan J, 1991. "Retrospective Capital Gains Taxation," American Economic Review, American Economic Association, vol. 81(1), pages 167-178, March.
  • Handle: RePEc:aea:aecrev:v:81:y:1991:i:1:p:167-78
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    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 611-636, May.
    2. Roger H. Gordon, 1985. "Taxation of Corporate Capital Income: Tax Revenues Versus Tax Distortions," The Quarterly Journal of Economics, Oxford University Press, vol. 100(1), pages 1-27.
    3. William Vickrey, 1939. "Averaging of Income for Income-Tax Purposes," Journal of Political Economy, University of Chicago Press, vol. 47, pages 379-379.
    4. Green, Jerry R & Sheshinski, Eytan, 1978. "Optimal Capital-Gains Taxation under Limited Information," Journal of Political Economy, University of Chicago Press, vol. 86(6), pages 1143-1158, December.
    5. Bulow, Jeremy I & Summers, Lawrence H, 1984. "The Taxation of Risky Assets," Journal of Political Economy, University of Chicago Press, vol. 92(1), pages 20-39, February.
    6. J. E. Stiglitz, 1969. "The Effects of Income, Wealth, and Capital Gains Taxation on Risk-Taking," The Quarterly Journal of Economics, Oxford University Press, vol. 83(2), pages 263-283.
    7. Alan J. Auerbach, 1981. "Evaluating the Taxation of Risky Assets," NBER Working Papers 0806, National Bureau of Economic Research, Inc.
    8. Sandmo, Agnar, 1985. "The effects of taxation on savings and risk taking," Handbook of Public Economics,in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 1, chapter 5, pages 265-311 Elsevier.
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