Do Americans have to pay income tax whenever value of stock appreciates (even if he does not sell in the market)? I doubt it. Since valuation of stock would vary.

Here in India, the only tax Mankiw would have to pay is when he sells the stock after 30 years and gets a capital gain. So, he would still have an effective 8% compound rate. So he would end up paying tax on $10000. Assuming 30%, he would still keep $7000.