Question

The country of Robinya has a tax system identical to that of the United States. Suppose someone in Robinya bought a parcel of land for 10,000 deera (the local currency) in 1970 when the price index equaled 100. In 2010, the person sold the land for 100,000 deera, and the price index equaled 500. The tax rate on nominal capital gains was 20 percent. Compute the taxes the person paid on the nominal gain and the change in the real value of the land in terms of 2010 prices to find the after-tax real rate of capital gain. Group of answer choices -20 percent 20 percent 42 percent 64 percent

Answer 1

64%

Step-by-step explanation:

The real value of the land is calculated as;

Real value = nominal value / CPI x 100

now as CPI of 1970 is 100. Then, 1970 is the base year.

The real value is equal to nominal value in the base year.

The nominal gain in capital is

100,000 - 10,000 = 90,000

Tax rate on gain 20%

20% of 90,000

= 18,000

After tax nominal value of capital

100,000 - 18,000 = 82,000

Real value of after tax capital

82,000 / 500 x 100 = 16,400

Gain in real after tax capital is

Gain =16,400 - 10,000 / 10,000 x 100

= 64%