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Inflation, real interest tax wedges, and capital formation

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  • William G. Dewald

Abstract

Inflation magnifies the distorting effects of taxation when the tax treatment of interest income and expense is not fully indexed to inflation. The distortion involves a real interest tax wedge which is the difference between the real before tax interest rate that influences fully taxed investors and the real after tax interest rate that influences savers. Reducing the real tax wedge by eliminating inflation or indexing would stimulate private saving and non-residential investment, but decrease tax receipts and the tax deductions that subsidize home ownership.

Suggested Citation

  • William G. Dewald, 1998. "Inflation, real interest tax wedges, and capital formation," Working Papers 1998-005, Federal Reserve Bank of St. Louis.
    • Handle: RePEc:fip:fedlwp:1998-005
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    References listed on IDEAS

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    7. William G. Dewald, 1986. "Government Deficits in a Generalized Fisherian Credit Market: Theory with an Application to Indexing Interest Taxation (Déficits publics dans le contexte d'un marché du crédit décrit par un modèl," IMF Staff Papers, Palgrave Macmillan, vol. 33(2), pages 243-275, June.
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    Cited by:

    1. Michael D. Bordo & William G. Dewald, 2001. "Bond Market Inflation Expectations in Industrial Countries: Historical Comparisons," NBER Working Papers 8582, National Bureau of Economic Research, Inc.

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