Inflation, Taxation, and Corporate Behavior
During the past decade, the inflation rate has been very high by historical standards, yet the U.S. tax law has yet to adjust to this fact. The purpose of this paper is to investigate to what degree the lack of indexing of the corporate and personal income taxes by itself ought to have resulted in a change in corporate investment and financial policy, and in capital gains or losses to existing owners of corporate equity. In studying these questions, the paper models corporate financial and real decisions simultaneously, unlike other recent studies. The principle conclusions of the paper are: 1) the doubling of corporate debt-value rations can easily be rationalized solely by the interaction of inflation and the tax laws, 2) the stock market and the level of investment behaved much less favourably than would have been forecast focusing solely on the increased inflation rate, and 3) more pessimistic expectations, perhaps in combination with increased riskiness, would provide a consistent rationale for observed behaviour.
|Date of creation:||Dec 1980|
|Publication status:||published as Gordon, Roger H. "Inflation, Taxation, and Corporate Behavior." Quarterly Journal of Economics, Vol. 99, No. 2, May 1984, pp. 313-327.|
|Contact details of provider:|| Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.|
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- Roger H. Gordon & David F. Bradford, 1980.
"Taxation and the stock market valuation of capital gains and dividends : Theory and emphirical results,"
in: Econometric Studies in Public Finance, pages 109-136
National Bureau of Economic Research, Inc.
- Gordon, Roger H. & Bradford, David F., 1980. "Taxation and the stock market valuation of capital gains and dividends : Theory and emphirical results," Journal of Public Economics, Elsevier, vol. 14(2), pages 109-136, October.
- Feldstein, Martin S & Eckstein, Otto, 1970. "The Fundamental Determinants of the Interest Rate," The Review of Economics and Statistics, MIT Press, vol. 52(4), pages 363-375, November.
- Martin Feldstein, 1978.
"Inflation and the Stock Market,"
NBER Working Papers
0276, National Bureau of Economic Research, Inc.
- Martin Feldstein, 1983. "Inflation and the Stock Market," NBER Chapters, in: Inflation, Tax Rules, and Capital Formation, pages 186-198 National Bureau of Economic Research, Inc.
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- Martin Feldstein & Lawrence Summers, 1977. "Is the Rate of Profit Falling?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 8(1), pages 211-228.
- Alan J. Auerbach & Mervyn A. King, 1979. "Corporate Financial Policy, Taxes, and Uncertainty: An Integration," NBER Working Papers 0324, National Bureau of Economic Research, Inc.
- Tobin, James, 1969. "A General Equilibrium Approach to Monetary Theory," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 1(1), pages 15-29, February.
- Malkiel, Burton G, 1979. "The Capital Formation Problem in the United States," Journal of Finance, American Finance Association, vol. 34(2), pages 291-306, May.
- McCulloch, J Huston, 1975. "The Tax-Adjusted Yield Curve," Journal of Finance, American Finance Association, vol. 30(3), pages 811-830, June.
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