Ex-Post Equivalence under Capital Gain Taxation

In this article, we analyze a state-contingent tax on capital gains. We start by focusing on Auerbach's (1991) retrospective capital gains tax device. Although this system is equivalent to an accrual method from an ex-ante perspective, it is not on an ex-post basis. As recognized by Auerbach, this causes a fairness problem. To overcome this limitation, we follow Zhu (1992) a design a state-contingent tax rule. As will be proven, state-contingent taxation can modify the risk profile of assets and also ensure ex-post equivalence.