the horrendous extent claimed by some economists. Nevertheless, the distortion in the example (from a nominal tax rate of 28 percent to an effective tax rate of 32 percent) is significant. The distortion represents an effective income tax increase on capital gains approximating 14.3 percent. Nor is the assumed 100 percent inflation over a 10 year time period unrealistic. During the 1970s (1970 1979), the Consumer Price Index (CPI) increased 97.6 percent, while during the 1980s (1980 1989), the CPI increased 70.7 percent, and during the 10 year time period 1974 1983, the CPI increased 124.1 percent (calculated from data obtained from: Council of Economic Advisers, 1990).
Changes in nominal tax rates are not considered in assessing the distortionary effects of inflation on taxes. As
the use of comparable data is required in valuations for such an assessment, so, too, tax rates must be comparable.CAPITAL GAINS
A capital gain results from the appreciation in value of a capital asset (Feldstein, 1983). Feldstei
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