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Uncertainty, Welfare Cost, and the 'Adaptability' of U.S. Corporate Taxes


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  • Don Fullerton
  • Andrew B. Lyon
  • Richard J. Rosen


Alternative corporate tax systems differ in their ability to adapt to changes in the rate of inflation. Absent complete indexing of depreciation allowances, a tax system may use the expected inflation rate to set accelerated depreciation allowances in a way that minimizes the welfare loss from them is allocation of capital. This welfare loss is a nonlinear function of the assumed inflation rate, however, so the welfare loss at the expected inflation rate may be quite different from the expected welfare loss. We compute these two welfare concepts for each of three alternative corporate tax schemes in the U.S. and for two different relationships between inflation and interest rates. One important finding is that the Auerbach-Jorgenson first year recovery plan is not equivalent to indexing as is often claimed, if uncertainty about inflation implies uncertainty about the real after-tax discount rate.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1239.

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Date of creation: Nov 1983
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Publication status: published as Fullerton, Don, Andrew B. Lyon and Richard J. Rosen. "Uncertainty, Welfare Cost and the 'Adaptability' of U.S. Corporate Taxes." Scandinavian Journal of Economics, Vol. 86, No. 2, (1984), pp. 229- 243.
Handle: RePEc:nbr:nberwo:1239

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  1. Mervyn A. King & Don Fullerton, 1983. "The Taxation of Income from Capital: A Comparative Study of the U.S., U.K., Sweden, and West Germany--The Theoretical Framework--," NBER Working Papers 1058, National Bureau of Economic Research, Inc.
  2. Fullerton, Don & Henderson, Yolanda Kodrzycki, 1985. "Long-run Effects of the Accelerated Cost Recovery System," The Review of Economics and Statistics, MIT Press, vol. 67(3), pages 363-72, August.
  3. David F. Bradford, 1978. "Tax Neutrality and the Investment Tax Credit," NBER Working Papers 0269, National Bureau of Economic Research, Inc.
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Cited by:
  1. Don Fullerton & Andrew B. Lyon, 1987. "Tax Neutrality and Intangible Capital," NBER Working Papers 2430, National Bureau of Economic Research, Inc.


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