Question

Inflation sometimes causes people to pay _____ capital gains tax than they ought to

Answer 1

Inflation sometimes causes people to pay increasing capital gains tax than they ought to. When accounting for inflation, capital gains tax may rise if there was an increase in the real purchasing power of an asset when the value of the asset did not increase. If capital gains were adjusted in relation to inflation, the tax would be a zero value.

Answer 2

Answer:

This question is incomplete. The complete question is as follows:

Inflation sometimes causes people to pay ________ capital gains tax than they ought to, ________.

more; if much of their calculated profits from selling assets was due to inflation

less; because tax laws do not typically account for inflation

more; because the inflation adjustments in tax laws overcompensate for inflation

more; if they neglect to claim the inflation adjustment that tax laws allow

less; because inflation creates the opportunity for a tax write-off

The answer is: more; if much of their calculated profits from selling assets was due to inflation

Explanation:

An increase in an asset's price is determined based on the nominal amount and not the real value adjusted for inflation. If this asset is sold above cost, then a profit/gain on sale is calculated and taxed fully by the tax authorities. There is no distinction between an increase in price brought about by inflation versus an increase associated with value appreciation hence no adjustment for inflation prior to the tax computation. Owing to this, an increase in value brought purely by inflation increases the effective tax rate and tax amount payable.