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Inflation, real interest tax wedges, and capital formation

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  • William G. Dewald

Abstract

William G. Dewald, director of research for the St. Louis Fed, examines how inflation magnifies the distorting effects of taxation when the tax treatment of interest income and expense is not fully indexed to inflation. The distortion involves a real interest tax wedge which is the difference between the real before-tax interest rate that influences fully taxed investors and the real after-tax interest rate that influences savers. Reducing the real tax wedge by eliminating inflation or indexing would stimulate private saving and nonresidential investment but decrease tax receipts and the tax deductions that subsidize home ownership.

Suggested Citation

  • William G. Dewald, 1998. "Inflation, real interest tax wedges, and capital formation," Review, Federal Reserve Bank of St. Louis, issue Jan, pages 29-35.
  • Handle: RePEc:fip:fedlrv:y:1998:i:jan:p:29-35
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    File URL: https://files.stlouisfed.org/files/htdocs/publications/review/98/01/9801wd.pdf
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    References listed on IDEAS

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    1. Auerbach, Alan J, 1983. "Taxation, Corporate Financial Policy and the Cost of Capital," Journal of Economic Literature, American Economic Association, vol. 21(3), pages 905-940, September.
    2. Mervyn A. King & Don Fullerton, 1984. "West Germany," NBER Chapters,in: The Taxation of Income from Capital: A Comparative Study of the United States, the United Kingdom, Sweden, and Germany, pages 149-192 National Bureau of Economic Research, Inc.
    3. Steven M. Fazzari & Benjamin Herzon, "undated". "Capital Gains Taxes and Economic Growth, Effects of a Capital Gains Tax Cut on the Investment Behavior of Firms," Economics Public Policy Brief Archive ppb_25, Levy Economics Institute.
    4. Stiglitz, Joseph E., 1973. "Taxation, corporate financial policy, and the cost of capital," Journal of Public Economics, Elsevier, vol. 2(1), pages 1-34, February.
    5. William G. Dewald, 1986. "Government Deficits in a Generalized Fisherian Credit Market: Theory with an Application to Indexing Interest Taxation (Déficits publics dans le contexte d'un marché du crédit décrit par un modèl," IMF Staff Papers, Palgrave Macmillan, vol. 33(2), pages 243-275, June.
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    Cited by:

    1. Michael D. Bordo & William G. Dewald, 2001. "Bond Market Inflation Expectations in Industrial Countries: Historical Comparisons," NBER Working Papers 8582, National Bureau of Economic Research, Inc.

    More about this item

    Keywords

    Inflation (Finance) ; Capital ; Taxation;

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