Working Paper: NBER ID: w0547
Authors: Alan J. Auerbach
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.
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Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Inflation (E31) | choice of asset durability (D25) |
| Inflation (E31) | asset holding period (G32) |
| Inflation (E31) | debt-equity ratio (G32) |
| Inflation (E31) | scale of investment (E22) |
| choice of asset durability (D25) | tax benefits (H20) |
| asset holding period (G32) | tax deductions (H20) |
| debt-equity ratio (G32) | leverage (G24) |
| scale of investment (E22) | real after-tax returns (G19) |