Inflation and the Tax Treatment of Firm Behavior

Alan Auerbach

No 547, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: In the past decade, economists have be-gun to realize that inflation, even when fully anticipated, constitutes a great deal more than a tax on money balances. The primary reason for inflation's wider impact is the existence of a tax system designed with stable prices in mind. This paper offers a brief summary of the effects of inflation on the tax treatment of the firm, focusing on four important decisions the firm makes: the scale of investment; the method of finance; the durability of assets used in production; and the holding period of these assets. There are a number of interesting and related issues which cannot be covered in a paper of this length. As I will be considering inflation that is both uniform and fully anticipated, questions concerning the behavior of the firm in response to uncertainty about inflation, or to a concommitant change in relative prices, will not arise.

Date: 1980-09
Note: PE
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Published as Auerbach, Alan J. "Inflation and the Tax Treatment of Firm Behavior." The American Economic Review, Vol. 71, No. 2, (May 1981), pp. 419-423.

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