Corporate income and capital gains tax

CFA Level III Equities
#1

Sch bk 3 LOS 23a, Pg 118

Dear all,

The last sentence in the second para states the following:

‘First, because corporate income and capital gains tax rates are not index to inflation, inflation can reduce the stock and investor’s return, unless this effect was priced into the stock whent he investor bought it.’

I am confused with above statement to either understand or memorise it.

Can anyone provide me with a more clear understanding/explanation.

Thanks in advance.

#2

If inflation is high, you could buy a stock for $100 and sell it for $200 5 years later; and those $200 would be worth the same in real terms as your original $100. But you still have to pay $20 in taxes though your real return is zero.

#3

Naren_, Thank you