CHAPTER 28MONEY GROWTH AND INFLATION645Economists who have studied the tax code conclude that inflation tends to raisethe tax burden on income earned from savings.One example of how inflation discourages saving is the tax treatment of capitalgains—the profits made by selling an asset for more than its purchase price. Sup-pose that in 1980 you used some of your savings to buy stock in Microsoft Corpo-ration for $10 and that in 2000 you sold the stock for $50. According to the tax law,you have earned a capital gain of $40, which you must include in your incomewhen computing how much income tax you owe. But suppose the overall pricelevel doubled from 1980 to 2000. In this case, the $10 you invested in 1980 is equiv-alent (in terms of purchasing power) to $20 in 2000. When you sell your stock for$50, you have a real gain (an increase in purchasing power) of only $30. The taxcode, however, does not take account of inflation and assesses you a tax on a gainof $40. Thus, inflation exaggerates the size of capital gains and inadvertently in-
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This note was uploaded on 07/30/2010 for the course ECON 120 taught by Professor Abijian during the Spring '10 term at Mesa CC.