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. Another result is that accelerated depreciation increases the accumulation of business capital but that, unless firms are permitted to expense all investment immediately, an increase in inflation continues to depress the accumulation of business capital.
This paper is part of the NBER study of Capital Formation. I am grateful to my colleagues at the NBER for numerous discussions of this subject and for comments on an earlier draft. Lars Calmfors also provided valuable editorial suggestions.
This is a preview of subscription content, log in via an institution to check access.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
Preview
Unable to display preview. Download preview PDF.
Reference
Auerbach, Alan: Appendix to “Inflation and taxes in a growing economy with debt and equity finance” by M. Feldstein, J. Green & E. Sheshinski, Journal of Political Economy 86, S68–70, 1979.
Barro, Robert J.: Unanticipated money growth and unemployment in the U.S. American Economic Review 67, 101–115, 1977.
Blinder, Alan S.: Economic policy and the great stagflation. Academic Press, New York, 1979.
Eckstein, Otto: The great recession. North Holland, Amsterdam, 1978.
Feldstein, Martin: Inflation, income taxes, and the rate of interest: A theoretical analysis. The American Economic Review 66, 809–820, 1976.
Feldstein, Martin: Fiscal policies, inflation and capital formation. American Economic Review 70, 636–650, 1980 a.
Feldstein, Martin: Inflation, capital taxation and monetary policy in R. Hall (ed.), Inflation. NBER Conference Volume, forthcoming, 1980 b.
Feldstein, Martin: Inflation, tax rules and the stock market. Journal of Monetary Economics 6, 309–331, 1980 c.
Feldstein, Martin: Tax rules and the mismanagement of monetary policy. The American Economic Review 70, 182–186, 1980 d.
Feldstein, Martin: Inflation, tax rules, and investment: Some econometric evidence. The Fisher-Schultz Lecture at the Fourth World Congress of Econometric Society, August 1980 and Econometrica, forthcoming.
Feldstein, Martin: Inflation in the American economy. The Joseph Schumpeter Lecture at the University of Vienna, March 1981, Empirica, forthcoming. (A revised version will also appear in the Public Interest, 1982.)
Feldstein, Martin: with Jerry Green and Eytan Sheshinski: Inflation and taxes in a growing economy with debt and equity finance. Journal of Political Economy 86, S53–70, 1978.
Feldstein, Martin: with Jerry Green and Eytan Sheshinski: Corporate financial policy and taxation in a growing economy. The Quarterly Journal of Economics, 411–432, 1979.
Feldstein, Martin: with Lawrence Summers: Inflation and the taxation of capital income in the corporate sector. National Tax Journal 32, 445–70, 1980.
Friedman, Milton: The role of monetary policy. American Economic Review 59, 1–17, 1968.
Fischer, Stanley: Anticipations and the nonneutrality of money. Journal of Political Economy 87, 225–53, 1979 a.
Fischer, Stanley: Rational expectations and economic policy. University of Chicago Press, 1979 b.
Gordon, Roger H. & Malkiel, Burton G.: Corporation finance. In How taxes affect economic behavior (ed. H. Aaron and J. Pechman), pp. 131–198. The Brookings Institution, 1981.
Hendershott, Patrie & Shilling, James D.: The economics of tenure choice: 1955–79. NBER Working Paper No. 543, 1980.
Hendershott, Patrie H.: The decline in aggregate share values: Inflation and taxation of the returns from equities and owner-occupied housing. NBER Working Paper No. 370, 1979.
Hendershott, Patrie & Hu, Sheng Cheng: Inflation and the benefits from owner-occupied housing. NBER Working Paper No. 383, 1979.
Lucas, Robert E.: Expectations and the neutrality of money. Journal of Economic Theory 4, 103–124, 1972.
Musgrave, John: Fixed nonresidential business and residential capital in the United States, 1929–75. Survey of Current Business, April 1976.
Polinsky, A. M.: The demand for housing: A study in specification and grouping. Econometrica 45, 1977.
Poterba, James: Inflation, income taxes and owner-occupied housing. NBER Working Paper No. 553, 1980.
Sargent, T. J. & Wallace, N.: Rational expectations, the optimal monetary instrument, and the optimal money supply rule. Journal of Political Economy 84, 207–54, 1975.
Stiglitz, Joseph: Taxation, corporate financial policy, and the cost of capital. Journal of Public Economics, 1–34, 1973.
Summers, Lawrence: Inflation and the tax system. American Economic Review 71, 429–434, 1981.
Tobin, James: Money and economic growth. Econometrica 33, 1965.
Author information
Authors and Affiliations
Editor information
Editors and Affiliations
Copyright information
© 1983 The Scandinavian Journal of Economics
About this chapter
Cite this chapter
Feldstein, M. (1983). Inflation, Tax Rules and the Accumulation of Residential and Nonresidential Capital. In: Calmfors, L. (eds) Long-Run Effects of Short-Run Stabilization Policy. Scandinavian Journal of Economics. Palgrave Macmillan, London. https://doi.org/10.1007/978-1-349-06349-9_12
Download citation
DOI: https://doi.org/10.1007/978-1-349-06349-9_12
Publisher Name: Palgrave Macmillan, London
Print ISBN: 978-1-349-06351-2
Online ISBN: 978-1-349-06349-9
eBook Packages: Palgrave Economics & Finance CollectionEconomics and Finance (R0)