Economics of Public Issues (20th Edition) (The Pearson Series in Economics)
Economics of Public Issues (20th Edition) (The Pearson Series in Economics)
20th Edition
ISBN: 9780134531984
Author: Roger LeRoy Miller, Daniel K. Benjamin, Douglass C. North
Publisher: PEARSON
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Chapter 11, Problem 2DQ
To determine

The effect of the reduction of temporary and permanent capital gain tax on assets sale and the way in which it is differed for large capital gain goods and small capital gain goods.

Concept introduction:

Capitalist gain tax:

Capitalist gain tax which is charged on a gain in the amount of capital, either due to an increase in the value of a good or due to the inflation existing in an economy.

Suppose a good is bought at $40 in 2018 and in 2019 it is sold at $50, then the capital gain is $10. So, the tax levied on such gain is known as capital gain tax.

Explanation:

  • The temporary cut in capital gain tax is completely different from the permanent cut in capital gain tax. When tax is cut for a shorter period of time, the people have an incentive on selling their assets and reinvesting in another portfolio.
  • However, when the tax cut is permanent then people would have incentives considering the future prospect of that asset. If the value seems to increase in the current time, then the people will hold the asset for future and if the value seems to degrade or remain same, then people would sell the asset.
  • The selling of the asset also depends on the capital gain of those assets. If the capital gain is very large, then the temporary cut will induce the people to sell the assets. If the capital gain is very small, then a temporary cut would not induce people to sell their assets.

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Chapter 11 Solutions

Economics of Public Issues (20th Edition) (The Pearson Series in Economics)

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