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Inflation, Taxation, and Corporate Behavior

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Roger H. Gordon

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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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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 0588.

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Date of creation: Dec 1980
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Handle: RePEc:nbr:nberwo:0588

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. 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. [Downloadable!] (restricted)
  2. Alan J. Auerbach & Mervyn A. King, 1982. "Corporate Financial Policy, Taxes, and Uncertainty: An Integration," NBER Working Papers 0324, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  3. Martin Feldstein & Lawrence Summers, 1977. "Is the Rate of Profit Falling?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 8(1977-1), pages 211-228. [Downloadable!]
  4. 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. [Downloadable!] (restricted)
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  5. 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. [Downloadable!] (restricted)
  6. 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. [Downloadable!] (restricted)
  7. Martin Feldstein, 1981. "Inflation and the Stock Market," NBER Working Papers 0276, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  8. McCulloch, J Huston, 1975. "The Tax-Adjusted Yield Curve," Journal of Finance, American Finance Association, vol. 30(3), pages 811-30, June. [Downloadable!] (restricted)
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  1. Don Fullerton & Roger H. Gordon, 1983. "A Reexamination of Tax Distortions in General Equilibrium Models," NBER Working Papers 0673, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  2. Darrel Cohen & Kevin A. Hassett & R. Glenn Hubbard, 1999. "Inflation and the User Cost of Capital: Does Inflation Still Matter?," NBER Working Papers 6046, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  3. Modigliani, Franco. & Cohn, Richard A., 1984. "Inflation and corporate financial management," Working papers 1572-84., Massachusetts Institute of Technology (MIT), Sloan School of Management. [Downloadable!]
  4. David F. Bradford, 1982. "Issues in the Design of Saving and Investment Incentives," NBER Working Papers 0637, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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