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Inflation, Tax Rules, and the Accumulation of Residential and Nonresidential Capital

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  • Martin Feldstein

Abstract

The 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 in£ lat ion continues to depress the accumulation of business capital.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 0753.

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Date of creation: Sep 1981
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Publication status: published as Feldstein, Martin. "Inflation, Tax Rules, and the Accumulation of Residential and Nonresidential Capital." Scandinavian Journal of Economics, Vol. 84, No. 2 (1982), pp. 293-311.
Handle: RePEc:nbr:nberwo:0753

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  1. Polinsky, A Mitchell, 1977. "The Demand for Housing: A Study in Specification and Grouping," Econometrica, Econometric Society, vol. 45(2), pages 447-61, March.
  2. Sargent, Thomas J & Wallace, Neil, 1975. ""Rational" Expectations, the Optimal Monetary Instrument, and the Optimal Money Supply Rule," Journal of Political Economy, University of Chicago Press, vol. 83(2), pages 241-54, April.
  3. Feldstein, Martin S & Green, Jerry & Sheshinski, Eytan, 1979. "Corporate Financial Policy and Taxation in a Growing Economy," The Quarterly Journal of Economics, MIT Press, vol. 93(3), pages 411-32, August.
  4. Martin Feldstei & Jerry Green & Eytan Sheshinski, 1978. "Inflation and Taxes in a Growing Economy with Debt and Equity Finance," NBER Chapters, in: Research in Taxation, pages 53-70 National Bureau of Economic Research, Inc.
  5. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April.
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Cited by:
  1. Richare Voith, 1999. "Does the tax treatment of housing create an incentive for exclusionary zoning and increased decentralization?," Working Papers 99-22, Federal Reserve Bank of Philadelphia.
  2. Robert Topel & Sherwin Rosen, 1985. "A Time Series Model of Housing Investment in the U.S," UCLA Economics Working Papers 387, UCLA Department of Economics.
  3. Charles Yuji Horioka, 2014. "The Life and Work of Martin Stuart ("Marty") Feldstein," ISER Discussion Paper 0905, Institute of Social and Economic Research, Osaka University.
  4. Joseph Gyourko & Richard Voith, 1997. "Does the U.S. tax treatment of housing promote suburbanization and central city decline?," Working Papers 97-13, Federal Reserve Bank of Philadelphia.
  5. Gervais, Martin, 2002. "Housing taxation and capital accumulation," Journal of Monetary Economics, Elsevier, vol. 49(7), pages 1461-1489, October.
  6. Berkovec, James & Fullerton, Don, 1989. "The General Equilibrium Effects of Inflation on Housing Consumption and Investment," American Economic Review, American Economic Association, vol. 79(2), pages 277-82, May.
  7. Martin Feldstein, 1982. "Capital Taxation," NBER Working Papers 0877, National Bureau of Economic Research, Inc.

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