Retrospective Capital Gains Taxation in a Dynamic Stochastic World

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 and serially correlated asset returns, we prove that such an equivalence still holds. This means that in a more realistic setting the realization-based system requires no ad hoc adjustment for equivalence to hold.