Exam 23: Taxes on Risk Taking and Wealth

Suppose that there is a 25% chance that an investment of $1,000 will rise in value to $1,400,a 25% chance that the investment will remain at $1,000,and a 50% chance that the investment will fall in value to $900.What is the expected profit associated with the investment?

Many county fairs have auctions at which the animals raised by children are sold to the highest bidders and the children get to keep the proceeds.For various reasons,the prices received by the children are typically much higher than the market prices would be for similar animals. (a)Suppose many of the bids were won by the grandparents of the children.Why might this behavior be caused by the existence of transfer taxes? (b)On the other hand,perhaps the grandparents just wished to support the agricultural endeavors of their grandchildren.Describe a way in which an empirical researcher could distinguish between this explanation and the tax explanation in part (a).

Which of the following assets CANNOT have a capital gain?

Which statement would be TRUE of a prospective capital gains tax reduction?

Henry George advocated a tax on land,rather than on the improvements or structures built on the land,because lowering tax rates on buildings but raising them on land:

A prospective capital gains tax reduction would:

Suppose that the government taxes any positive return on an asset and allows a full deduction of a negative return against taxable income.Which statement is TRUE under this scenario,versus one under which there are no taxes?

Suppose that there is a 75% chance that an investment of $1,000 will rise in value to $1,500,and a 25% chance that the investment will fall in value to $700.What is the expected return on the investment?

The primary source of wealth for most entrepreneurs comes from:

The basic model of taxation and risk taking was developed by Domar and Musgrave in 1944; it reached the conclusion that:

Suppose a person buys a share of stock for $10.The rate of taxation on accrual is 50% and the rate of taxation on realization is 25%.The day before the person dies,the stock is worth $20,as it is the day after the person dies.If the stock were sold the day before the person died,the government would receive ________ in taxes; if the stock were sold the day after the person died,the government would receive ________ in taxes.Assume that earnings on assets are taxed as they are in the current U.S.system.

Which of the following assets could yield a capital gain?

Suppose that there is a 25% chance that an investment of $1,000 will rise in value to $1,400,a 25% chance that the investment will remain at $1,000,and a 50% chance that the investment will fall in value to $500.The government introduces a 50% tax on returns to investment and allows a deduction against taxable income for any losses (assume that the tax rate is 50%).What is the expected return on the investment?

Suppose you have a wealthy friend who is 60 years old and wants to know how to pass on her wealth to her children without paying more than necessary in taxes.What are some good strategies for minimizing her tax burden?

Assets that earn interest are taxed on _____; capital gains are taxed on _____.

Explain why a lower tax rate on capital gains might be justified as a way to protect investors against inflation.Is there an alternative approach to deal with the inflation problem? Explain.

A capital gain is best defined as the:

What are the two fundamental reasons a tax preference for capital gains is hard to eliminate for many capital goods?