Question

The country of Lessidinia has a tax system identical to that of the United States. Suppose someone in Lessidinia bought a parcel of land for 20,000 foci (the local currency) in 1960 when the price Index equaled 100. In 2002, the person sold the land for 100,000 foci, and the price index equaled 600. The tax rate on nominal gains was 20 percent. Compute the taxes on the nominal gain and the change in the real value of the land in terms of 2002 prices to find the after-tax real rate of capital gain.
A. -60 percent
B. -30 percent
C. 30 percent
D. 60 percent

Answer 1

Answer:

after tax real rate of capital gain = - 30%

so correct option is B. -30 percent

Explanation:

given data

bought land = 20,000 foci

price Index = 100

sold land = 100,000 foci

price index = 600

tax rate = 20 percent

to find out

Compute the taxes on the nominal gain and the change in the real value of the land and after-tax real rate of capital gain

solution

first we get here tax on nominal gains that is express as

tax on nominal gains = tax rate × gain

tax on nominal gains = 20% × ( 100,000 - 20,000 )

tax on nominal gains = 16000 foci

and

Real gain is here as

Real gain = sold land - price index ( bought land )

Real gain = $100,000 - 6 ( 20000)

Real gain = - $20000 foci

and

now after tax real rate of capital gain will be here as

after tax real rate of capital gain = (Real gain - tax on nominal gains ) ÷ ( sold land - real gain )   × 100

after tax real rate of capital gain = $\frac{-20000-16000}{120000}$  × 100

after tax real rate of capital gain = - 30%

so correct option is B. -30 percent