Inflation, taxes, and the durability of capital

Darrel Cohen and Kevin Hassett

No 1997-53, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: Auerbach (1979, 1981) has demonstrated that inflation can lead to large inter-asset distortions, with the negative effects of higher inflation unambiguously declining with asset life. We show that this is true only if depreciation is treated as geometric for tax purposes. When depreciation is straightline, higher inflation can have the opposite effect, discouraging investment in long-lived assets. Since our current system can be thought of as a mixture of straightline and geometric, the sign of the inter-asset distortion is indeterminate. We show that under current U.S. tax rules, the \"straightline\" and \"geometric\" effects approximately cancel for equipment, causing almost no inter-asset distortions. For structures, inflation clearly causes substitution into long-lived assets.

Keywords: Inflation (Finance); Taxation; Capital (search for similar items in EconPapers)
Date: 1997
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Citations: View citations in EconPapers (5)

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Related works:
Journal Article: Inflation, Taxes, and the Durability of Capital (1999)
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