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Inflation and the Tax Treatment of Firm Behavior

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  • Alan J. Auerbach

Abstract

In the past decade, economists have be-gun to realize that inflation, even when fully anticipated, constitutes a great deal more than a tax on money balances. The primary reason for inflation's wider impact is the existence of a tax system designed with stable prices in mind. This paper offers a brief summary of the effects of inflation on the tax treatment of the firm, focusing on four important decisions the firm makes: the scale of investment; the method of finance; the durability of assets used in production; and the holding period of these assets. There are a number of interesting and related issues which cannot be covered in a paper of this length. As I will be considering inflation that is both uniform and fully anticipated, questions concerning the behavior of the firm in response to uncertainty about inflation, or to a concommitant change in relative prices, will not arise.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 0547.

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Date of creation: Sep 1980
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Publication status: published as Auerbach, Alan J. "Inflation and the Tax Treatment of Firm Behavior." The American Economic Review, Vol. 71, No. 2, (May 1981), pp. 419-423.
Handle: RePEc:nbr:nberwo:0547

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  1. Auerbach, Alan J, 1979. "Inflation and the Choice of Asset Life," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 87(3), pages 621-38, June.
  2. Auerbach, Alan J, 1979. "Wealth Maximization and the Cost of Capital," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 93(3), pages 433-46, August.
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Cited by:
  1. Cohen, Darrel S. & Hassett, Kevin A., 1999. "Inflation, Taxes, and the Durability of Capital," National Tax Journal, National Tax Association, vol. 52(n. 1), pages 91-98, March.
  2. Alan J. Auerbach & David Reishus, 1986. "Taxes and the Merger Decision: An Empirical Analysis," NBER Working Papers 1855, National Bureau of Economic Research, Inc.
  3. David F. Bradford, 1981. "Issues in the Design of Saving and Investment Incentives," NBER Working Papers 0637, National Bureau of Economic Research, Inc.
  4. Darrel Cohen & Kevin A. Hassett & R. Glenn Hubbard, 1997. "Inflation and the User Cost of Capital: Does Inflation Still Matter?," NBER Working Papers 6046, National Bureau of Economic Research, Inc.
  5. Gordon, Roger H. & Ley, Eduardo, 1994. "Implications of Existing Tax Policy for Cross-Border Activity Between the United States and Mexico after NAFTA," National Tax Journal, National Tax Association, vol. 47(2), pages 435-46, June.

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