Inflation, Taxes, and the Durability of Capital | Zendy

Darrel Cohen | Zendy; Kevin A. Hassett | Zendy

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Inflation, Taxes, and the Durability of Capital

Author(s) -

Darrel Cohen,

Kevin A. Hassett

Publication year - 1997

Publication title -

finance and economics discussion series

Language(s) - English

Resource type - Journals

eISSN - 2767-3898

pISSN - 1936-2854

DOI - 10.17016/feds.1997.53

Subject(s) - depreciation (economics) , asset (computer security) , economics , monetary economics , inflation (cosmology) , distortion (music) , capital (architecture) , sign (mathematics) , investment (military) , fixed asset , econometrics , macroeconomics , capital formation , microeconomics , physics , production (economics) , mathematics , computer science , theoretical physics , history , computer security , cmos , law , amplifier , mathematical analysis , archaeology , profit (economics) , financial capital , political science , optoelectronics , politics

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.

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