Inflation, Tax Rules, and the Accumulation of Residential and Nonresidential Capital
AbstractThe present paper analyses the effect of the interaction between tax rules and inflation on the size and allocation of the capital stock with particular emphasis on the role of owner-occupied housing. The analysis is developed in the framework of an economy that is in equilibrium and in which a constant fraction of disposable income is saved. In this model, I show that, with current U.S. tax laws, an increase in the rate of inflation reduces the equilibrium amount of business capital employed in the economy and raises the amount of housing capital. The analysis also shows that a higher rate of inflation lowers the real net-of-tax rate of return to the provider of business capital. In a richer model than the current one, i.e., in a model in which the rate of personal saving was an increasing function of the net rate of return, a higher inflation rate would therefore lower the rate of saving. The present analysis also shows that permitting firms to depreciate investments more rapidly for tax purposes increases the accumulations of business capital but that, unless firms are permitted to expense all in- vestment immediately, an increase in inÂ£ lat ion continues to depress the accumulation of business capital.
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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 0753.
Date of creation: Nov 1982
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Publication status: published as Martin Feldstein. "Inflation, Tax Rules, and the Accumulation of Residential and Nonresidential Capital," in "Inflation, Tax Rules, and Capital Formation" University of Chicago Press (1983)
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Other versions of this item:
- Feldstein, Martin, 1982. " Inflation, Tax Rules and the Accumulation of Residential and Nonresidential Capital," Scandinavian Journal of Economics, Wiley Blackwell, vol. 84(2), pages 293-311.
- Martin Feldstein, 1983. "Inflation, Tax Rules, and the Accumulation of Residential and Nonresidential Capital," NBER Chapters, in: Inflation, Tax Rules, and Capital Formation, pages 81-100 National Bureau of Economic Research, Inc.
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