Retrospective Capital Gains Taxation in the Real World

16 Pages Posted: 29 Jun 2009

See all articles by Francesco Menoncin

Francesco Menoncin

University of Brescia - Department of Economics

Paolo M. Panteghini

Department of Economics and Management; CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Date Written: June 2009

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.

Keywords: capital gains, risk, taxation

JEL Classification: H25, H32

Suggested Citation

Menoncin, Francesco and Panteghini, Paolo M., Retrospective Capital Gains Taxation in the Real World (June 2009). CESifo Working Paper Series No. 2674, Available at SSRN: https://ssrn.com/abstract=1427127

Francesco Menoncin

University of Brescia - Department of Economics ( email )

Via San Faustino 74B
Brescia, 25122
Italy
0039-0302988806 (Phone)
0039-0302988837 (Fax)

HOME PAGE: http://www.eco.unibs.it/~menoncin/

Paolo M. Panteghini (Contact Author)

Department of Economics and Management ( email )

Contrada Santa Chiara 50
BRESCIA, BS 25122
Italy

CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.cesifo.de

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