Comment on M. Feldstein, “Inflation, Tax Rules and the Accumulation of Residential and Nonresidential Capital”

Abstract

It is a familiar point that investment in dwellings is encouraged, relative to other investment, by the nonimputation for tax purposes of the rental of owner-occupied dwellings. The possible source of bias in favour of residential investment indicated by Feldstein is entirely separate from this. It arises because inflation affects differently the tax liability on the return from the two different types of investment, on two accounts: the allowance made for inflation in measuring depreciation and inventory costs for corporate tax is incomplete; and the personal tax rate may not be the same as the corporate tax rate. In practice, Feldstein suggests, the first of these is the one that matters.