Suppose the annual inflation rate is 5%, and an asset bought at the beginning of the year for $50,000 is sold for $65,000. If the capital- gains tax rate is 30%, what is the (approximate) effective tax rate on the sale of this asset?
A) 7%.
B) 10%.
C) 9%.
D) 6%.
E) 8%.

Question

Quizplus · Accepted Answer

First, calculate the inflation-adjusted gain: $50,000 * 5% = $2,500. So, the inflation-adjusted sale price is $50,000 + $2,500 = $52,500. The real gain is $65,000 - $52,500 = $12,500. The tax on the gain is 30% of $12,500 = $3,750. The effective tax rate is the tax paid divided by the real gain: $3,750 / $12,500 = 30%. However, considering the original question's context and the options provided, it seems there was a misunderstanding in the calculation process. The correct approach should consider the nominal gain, which is $65,000 - $50,000 = $15,000. The tax on this nominal gain is 30% of $15,000 = $4,500. The effective tax rate in relation to the nominal gain is $4,500 / $15,000 = 30%. The discrepancy in the explanation indicates a need to correct the approach based on the provided options and the typical method of calculating effective tax rates on capital gains, which does not adjust for inflation in this context. Therefore, the correct calculation without considering inflation for the purpose of finding the effective tax rate as per the options given should be: The nominal gain is $15,000, and the tax paid is $4,500. The effective tax rate is the tax paid divided by the sale price (or sometimes considered as tax paid divided by the gain, but in this context, we're looking for a mistake in the initial explanation). Given the options and the mistake in the initial explanation, the focus should be on correctly identifying the effective tax rate based on the capital gains tax calculation without adjusting for inflation, which was not correctly addressed in the initial response.

Suppose the Annual Inflation Rate Is 5%, and an Asset