Supply-side economists argue that taxing of nominal gains and interest earnings during inflationary periods
A)results in an increased effective tax rate on real returns but will not retard saving.
B)will retard saving but will not increase the effective tax rate on real returns.
C)will increase the effective tax rate on real returns and will retard saving.
D)None of the above

Question

Quizplus · Accepted Answer

When nominal gains and interest earnings are taxed during inflationary periods, it increases the effective tax rate on real returns because the tax is applied to both the nominal gain and the inflationary increase, reducing the real return. This can discourage saving. Therefore, choice C, which states that such taxation will increase the effective tax rate on real returns and retard saving, is the best choice.

Supply-Side Economists Argue That Taxing of Nominal Gains and Interest