Answered: When someone owns an asset (such as a…

Brief Principles of Macroeconomics (MindTap Course List)

8th Edition

ISBN:9781337091985

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter18: Six Debates Over Macroeconomic Policy

Section: Chapter Questions

Problem 7PA

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Question

When someone owns an asset (such as a share of
stock) that rises in value, he has an “accrued” capital
gain. If he sells the asset, he “realizes” the gains that
have previously accrued. Under the U.S. income tax
system, realized capital gains are taxed, but accrued
gains are not.
a. Explain how individuals’ behavior is affected by
this rule.
b. Some economists believe that cuts in capital gains
tax rates, especially temporary ones, can raise tax
revenue. How might this be so?
c. Do you think it is a good rule to tax realized
but not accrued capital gains? Why or
why not?

Definition Definition Tax imposed by the government on the "gain" or increase in the value of an asset at the time of its sale by the owner. Capital gain is computed based on the purchase price and sale price of the asset. If the sale price of the asset is more than the purchase price, there is a gain on the sale of asset. A tax is imposed on such gain in accordance with the applicable tax rates at the time of sale.

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