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Inflation, Taxes, and the Durability of Capital

  • Cohen, Darrel S.
  • Hassett, Kevin A.

Auerbach demonstrated that inflation can lead to interasset distortions, with the negative effects of higher inflation unambiguously declining with asset life in the case of geometric economic and tax depreciation. We show that, when tax depreciation is straight-line, higher inflation can have the opposite effect, discouraging investment in long-lived assets. Also, we present several examples showing that, under historically relevant U.S. tax rules, higher inflation can sometimes favor relatively short-lived equipment, although the bias is always small.

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Article provided by National Tax Association in its journal National Tax Journal.

Volume (Year): 52 (1999)
Issue (Month): n. 1 (March)
Pages: 91-98

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Handle: RePEc:ntj:journl:v:52:y:1999:i:n._1:p:91-98
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  1. Alan J. Auerbach, 1980. "Inflation and the Tax Treatment of Firm Behavior," NBER Working Papers 0547, National Bureau of Economic Research, Inc.
  2. Martin Feldstein, 1996. "The Costs and Benefits of Going from Low Inflation to Price Stability," NBER Working Papers 5469, National Bureau of Economic Research, Inc.
  3. Auerbach, Alan J, 1979. "Inflation and the Choice of Asset Life," Journal of Political Economy, University of Chicago Press, vol. 87(3), pages 621-38, June.
  4. Alan J. Auerbach, 1982. "Taxation, Corporate Financial Policy and the Cost of Capital," NBER Working Papers 1026, National Bureau of Economic Research, Inc.
  5. Auerbach, Alan J., 1979. "Share valuation and corporate equity policy," Journal of Public Economics, Elsevier, vol. 11(3), pages 291-305, June.
  6. Darrel Cohen & Kevin A. Hassett & R. Glenn Hubbard, 1997. "Inflation and the User Cost of Capital: Does Inflation Still Matter?," NBER Working Papers 6046, National Bureau of Economic Research, Inc.
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