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Inflation, Taxes, and the Durability of Capital

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  • Cohen, Darrel S.
  • Hassett, Kevin A.

Abstract

Auerbach demonstrated that inflation can lead to interasset distortions, with the negative effects of higher inflation unambiguously declining with asset life in the case of geometric economic and tax depreciation. We show that, when tax depreciation is straight-line, higher inflation can have the opposite effect, discouraging investment in long-lived assets. Also, we present several examples showing that, under historically relevant U.S. tax rules, higher inflation can sometimes favor relatively short-lived equipment, although the bias is always small.

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Bibliographic Info

Article provided by National Tax Association in its journal National Tax Journal.

Volume (Year): 52 (1999)
Issue (Month): n. 1 (March)
Pages: 91-98

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Handle: RePEc:ntj:journl:v:52:y:1999:i:n._1:p:91-98

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References

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  1. Alan J. Auerbach, 1980. "Inflation and the Tax Treatment of Firm Behavior," NBER Working Papers 0547, National Bureau of Economic Research, Inc.
  2. Martin S. Feldstein, 1997. "The Costs and Benefits of Going from Low Inflation to Price Stability," NBER Chapters, in: Reducing Inflation: Motivation and Strategy, pages 123-166 National Bureau of Economic Research, Inc.
  3. Darrel Cohen & Kevin Hassett & R. Glenn Hubbard, 1999. "Inflation and the User Cost of Capital: Does Inflation Still Matter?," NBER Chapters, in: The Costs and Benefits of Price Stability, pages 199-234 National Bureau of Economic Research, Inc.
  4. Auerbach, Alan J., 1979. "Share valuation and corporate equity policy," Journal of Public Economics, Elsevier, vol. 11(3), pages 291-305, June.
  5. Auerbach, Alan J, 1983. "Taxation, Corporate Financial Policy and the Cost of Capital," Journal of Economic Literature, American Economic Association, vol. 21(3), pages 905-40, September.
  6. Alan J. Auerbach & Martin Feldstein, 1978. "Inflation and the Choice of Asset Life," NBER Working Papers 0253, National Bureau of Economic Research, Inc.
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Cited by:
  1. Kevin A. Hassett & R. Glenn Hubbard, 1999. "Are Investment Incentives Blunted by Changes in Prices of Capital Goods?," NBER Working Papers 6676, National Bureau of Economic Research, Inc.
  2. Alexander David & Pietro Veronesi, 2009. "What Ties Return Volatilities to Price Valuations and Fundamentals?," NBER Working Papers 15563, National Bureau of Economic Research, Inc.
  3. Chang Woon Nam & Doina Maria Radulescu, 2005. "Effects of Corporate Tax Reforms on SMEs’ Investment Decisions under the Particular Consideration of Inflation," CESifo Working Paper Series 1478, CESifo Group Munich.
  4. Goolsbee, Austan, 2004. "Taxes and the quality of capital," Journal of Public Economics, Elsevier, vol. 88(3-4), pages 519-543, March.

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