Working Paper: NBER ID: w1239
Authors: Don Fullerton; Andrew B. Lyon; Richard J. Rosen
Abstract: Alternative corporate tax systems differ in their ability to adapt to changes in the rate of inflation. Absent complete indexing of depreciation allowances, a tax system may use the expected inflation rate to set accelerated depreciation allowances in a way that minimizes the welfare loss from them is allocation of capital. This welfare loss is a nonlinear function of the assumed inflation rate, however, so the welfare loss at the expected inflation rate may be quite different from the expected welfare loss. We compute these two welfare concepts for each of three alternative corporate tax schemes in the U.S. and for two different relationships between inflation and interest rates. One important finding is that the Auerbach-Jorgenson first year recovery plan is not equivalent to indexing as is often claimed, if uncertainty about inflation implies uncertainty about the real after-tax discount rate.
Keywords: corporate taxes; inflation; welfare cost; tax policy
JEL Codes: H25; H32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| tax schemes (H26) | capital allocation (G31) |
| tax schemes (H26) | investment incentives (O31) |
| inflation rates (E31) | welfare costs (I30) |
| uncertainty about inflation (D89) | real after-tax discount rate (H43) |
| welfare cost at expected inflation rate (D69) | actual expected welfare cost (D69) |
| Accelerated Cost Recovery System (ACRS) (G31) | greater welfare losses (D69) |
| welfare cost function convexity (D69) | expected welfare cost (D69) |
| Auerbach-Jorgenson plan (P11) | welfare cost ratio (D69) |