Economics of Macro Issues 7th Edition by Roger LeRoy Miller,Daniel Benjamin

Exercise 2

When the capital gains tax rate was reduced from 28 to 20 percent in 1997 and especially when it was cut again to 15 percent in 2003, many people believed that these reductions would be temporary. How did this belief affect the incentives to sell assets when the tax rates were cut, compared to a situation in which taxes were cut permanently? How would the belief that the cuts were temporary alter the choice between selling assets that had experienced large capital gains versus those that had experienced only small capital gains?