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Inflation and the Taxation of Capital Income in the Corporate Sector

In: Inflation, Tax Rules, and Capital Formation

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  • Martin Feldstein
  • Lawrence Summers

Abstract

This detailed examination of the effect of inflation on the taxation of capital used by nonfinancial corporations considers not only the tax paid by the corporations them- selves but also the tax paid by the individuals and institutions that provide capital to the corporate sector. Although corporations deduct nominal interest payments that exceed real interest, the additional taxes that lenders pay slightly exceed the tax saving by corporate borrowers. Our calculations indicate that inflation raised the 1977 tax burden on corporate sector capital income by more than $32 billion, a 50 percent increase in the total tax burden.

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This chapter was published in:

  • Martin Feldstein, 1983. "Inflation, Tax Rules, and Capital Formation," NBER Books, National Bureau of Economic Research, Inc, number feld83-1, May.
    This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 11333.

    Handle: RePEc:nbr:nberch:11333

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    1. Feldstein, Martin, 1980. "Fiscal Policies, Inflation, and Capital Formation," American Economic Review, American Economic Association, vol. 70(4), pages 636-50, September.
    2. Martin Feldstein & Lawrence Summers, 1978. "Inflation, Tax Rules, and the Long Term-Interest Rate," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 9(1), pages 61-110.
    3. Sheshinski, Eytan & Feldstein, Martin & Green, Jerry & Auerbach, Alan, 1978. "Inflation and Taxes in a Growing Economy with Debt and Equity Finance," Scholarly Articles 3203645, Harvard University Department of Economics.
    4. Aaron, Henry J, 1976. "Inflation and the Income Tax," American Economic Review, American Economic Association, vol. 66(2), pages 193-99, May.
    5. Bradford, David F., 1981. "The incidence and allocation effects of a tax on corporate distributions," Journal of Public Economics, Elsevier, vol. 15(1), pages 1-22, February.
    6. Michael C. Lovell, 1978. "The Profit Picture: Trends and Cycles," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 9(3), pages 769-789.
    7. Auerbach, Alan J., 1979. "Share valuation and corporate equity policy," Journal of Public Economics, Elsevier, vol. 11(3), pages 291-305, June.
    8. Lawrence H. Summers, 1978. "Tax Policy in a Life Cycle Model," NBER Working Papers 0302, National Bureau of Economic Research, Inc.
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