The country of Aquilonia has a tax system identical to that of Canada. Suppose someone in Aquilonia bought a parcel of land for $10 000 in 1960 when the price index equalled 100. In 2002, the person sold the land for $100 000, and the price index equalled 500. If the person must pay 20 percent of any capital gain in taxes, which of the following is the after-tax real capital gain (in 2002 dollars) on the land?

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Quizplus · Accepted Answer

The real capital gain is calculated by adjusting the nominal gain for inflation. The nominal gain is $100,000 - $10,000 = $90,000. The price index increased from 100 to 500, so the real value of the original purchase price in 2002 dollars is $10,000 * (500/100) = $50,000. The real capital gain is $100,000 - $50,000 = $50,000. The tax on the nominal gain is $90,000 * 20% = $18,000. The after-tax real capital gain is $50,000 - $18,000 = $32,000.

The Country of Aquilonia Has a Tax System Identical to That