Question

Thirty years ago Daniel bought a plot of land for $50,000 when the CPI was 50. Now the CPI is 180 and he sold the land for $180,000. What issue might inflation cause for Daniel?

options:a. tax distortionsb. shoe-leather costsc. price confusiond. money illusion

Answer 1

a. tax distortions

Step-by-step explanation:

Daniel bought a plot of land 30 years ago for $50,000 and consumer price index (CPI) of 50.

Now he sold the land at $180,000 and CPI is 180.

Due to changes in CPI for the period Daniel will experience inflation induced tax distortion.

An increase in inflation tends to increase tax burden. Capital gain on his sale of the (180,000- 50,000= $130,000) will be taxed, and as inflation has increased this will bring down the value he got from the sale.

There is tax on nominal capital gains, inflation is not considered in the tax calculation.

Tax on nominal interest gained is another effect of tax distortion.