What Would Be the Effect of Indexing the Tax System

question 109

Multiple Choice

What would be the effect of indexing the tax system to take into account the effects of inflation on taxing capital gains?

• A) Only real interest earnings would be taxed.
• B) The tax burden on capital gains would increase.
• C) Average tax rates would increase.
• D) Investors would be worse off.

---

Definitions:

Market Rate

The prevailing price or interest level determined by the supply and demand dynamics in a competitive marketplace.

Journal Entry

A record of a financial transaction in the accounting system that includes the date, accounts affected, amounts, and description of the transaction.

Callable Bonds

Bonds that can be redeemed by the issuer before their maturity date at a specified price, usually at a premium to the face value.

Market Rate

The prevailing interest rate available in the marketplace for instruments of similar credit risk and maturity.