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Inflation, Taxation, and Corporate Behavior

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  • Gordon, Roger H

Abstract

During the past decade, the inflation rate has been very high by historical standards, yet the U.S. tax law has yet to adjust to this fact. The purpose of this paper is to investigate to what degree the lack of indexing of the corporate and personal income taxes by itself ought to have resulted in a change in corporate investment and financial policy, and in capital gains or losses to existing owners of corporate equity. In studying these questions, the paper models corporate financial and real decisions simultaneously, unlike other recent studies. The principle conclusions of the paper are: 1) the doubling of corporate debt-value rations can easily be rationalized solely by the interaction of inflation and the tax laws, 2) the stock market and the level of investment behaved much less favourably than would have been forecast focusing solely on the increased inflation rate, and 3) more pessimistic expectations, perhaps in combination with increased riskiness, would provide a consistent rationale for observed behaviour.

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Bibliographic Info

Article provided by MIT Press in its journal Quarterly Journal of Economics.

Volume (Year): 99 (1984)
Issue (Month): 2 (May)
Pages: 312-27

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Handle: RePEc:tpr:qjecon:v:99:y:1984:i:2:p:312-27

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References

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  1. Feldstein, Martin, 1980. "Inflation and the Stock Market," American Economic Review, American Economic Association, vol. 70(5), pages 839-47, December.
  2. Gordon, Roger H. & Bradford, David F., 1980. "Taxation and the stock market valuation of capital gains and dividends : Theory and emphirical results," Journal of Public Economics, Elsevier, vol. 14(2), pages 109-136, October.
  3. Alan J. Auerbach & Mervyn A. King, 1979. "Corporate Financial Policy, Taxes, and Uncertainty: An Integration," NBER Working Papers 0324, National Bureau of Economic Research, Inc.
  4. Martin Feldstein & Lawrence Summers, 1977. "Is the Rate of Profit Falling?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 8(1), pages 211-228.
  5. Feldstein, Martin S & Eckstein, Otto, 1970. "The Fundamental Determinants of the Interest Rate," The Review of Economics and Statistics, MIT Press, vol. 52(4), pages 363-75, November.
  6. Malkiel, Burton G, 1979. "The Capital Formation Problem in the United States," Journal of Finance, American Finance Association, vol. 34(2), pages 291-306, May.
  7. Tobin, James, 1969. "A General Equilibrium Approach to Monetary Theory," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 1(1), pages 15-29, February.
  8. McCulloch, J Huston, 1975. "The Tax-Adjusted Yield Curve," Journal of Finance, American Finance Association, vol. 30(3), pages 811-30, June.
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Cited by:
  1. Modigliani, Franco. & Cohn, Richard A., 1984. "Inflation and corporate financial management," Working papers 1572-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  2. David F. Bradford, 1981. "Issues in the Design of Saving and Investment Incentives," NBER Working Papers 0637, 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. Don Fullerton & Roger H. Gordon, 1983. "A Reexamination of Tax Distortions in General Equilibrium Models," NBER Chapters, in: Behavioral Simulation Methods in Tax Policy Analysis, pages 369-426 National Bureau of Economic Research, Inc.

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