Free Micro-Economics Critical Thinking Example

Q: How does the capital gains tax affect investing?

Capital Gains taxes are the mandatory payments to be made by the investors once profit is realized on sale of a capital asset. Although the tax provision attracts billion dollar inflow for the Federal Government, but the tax itself have a substantial effect on the investment decision of the investors. The most popular and substantial effect of capital gains tax on the investments is the ‘’lock-in effect’’. The nature of capital gains taxes relates it to be on realization basis, i.e. tax is required to be paid only when the investors withdraws his money from the market and capital gain is realized. However, this provision creates incentive for the investors to retain their investment and avoid the taxation on their gains even when further profitable opportunities are available.
Thus, if the rate of capital gains taxes is so high that it induces the investors to defer the sale of his capital asset, it can reduce the economic growth by preventing the reallocation of capital in low-performing investments to more profitable ventures, and this is what we called ‘Lock-in effect’.
Q: The US may soon become a leading oil producer. Comment on the economic impact of this outcome.The crude oil production in US during January, 2015 reached 9.3 million barrels per day, which is the highest in the history of the country. The supply shock is however; bringing positive impacts for the nation as the growing crude surplus is causing decline in price levels and thus boosting the economic activity and job creation activity in the nation. This is rare economic situation which is termed as ‘Expansionary Disinflation’’ by the market players.

Works Cited

Hartley, J. (n.d.). The Economic Impact Of Falling Oil Prices: 'Expansionary Disinflation. Retrieved February 15, 2015, from http://www.forbes.com/sites/jonhartley/2015/01/12/the-economic-impact-of-declining-oil-prices-expansionary-disinflation/
SHORT-TERM ENERGY OUTLOOK. (n.d.). Retrieved February 12, 2015, from http://www.eia.gov/forecasts/steo/
The Overwhelming Case Against Capital Gains Taxation. (n.d.). Retrieved February 15, 2015, from Forbes: http://www.forbes.com/sites/danielmitchell/2014/11/07/the-overwhelming-case-against-capital-gains-taxation/