Valuation before and after tax in the discrete time, finite state no arbitrage model |
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Authors: | Bjarne Astrup Jensen |
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Affiliation: | (1) Department of Finance, Copenhagen Business School, Solbjerg Plads 3, 2000 Frederiksberg, Denmark |
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Abstract: | We establish necessary and sufficient conditions for a linear taxation system to be neutral—within the multi-period discrete time “no arbitrage” model—in the sense that valuation is invariant to the exact sequence of tax rates, realization dates as well as immune to timing options attempting to twist the time profile of taxable income through wash sale transactions. “In the study of investments, taxes are largely a source of embarrassment to financial economists.” (Introduction to Dybvig and Ross 1986) “Accordingly, my approach in this chapter is to examine the restrictions on the income measurement rules applicable to financial instruments implied by the requirement that the rules be linear. . . . Linearity is a desideratum of a tidy tax system.” (Bradford 2000, p. 373–374) |
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Keywords: | Tax neutrality Mark-to-market valuation Generalized linear taxation schemes Wash sales |
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