Inflation, Corporate Income Taxation, and the Demand for Capital Assets

Consumption and Investment

“…The argument underlying these results can be illustrated using the expression for q in (79) which was derived under the assumpdon that the revenue function is linearly homogeneous in K and L. This equation would apply to a competitive firm with a constant returns to scale production function. It can be shown that the 40See Auerbach (t979b), Kopcke (1981), and Abel (1981 Recently, Zeira (1987) has developed a model of a monopolistic firm that is uncertain both about its own capacity and about the demand curve it faces. In this particular model, increased price uncertainty will reduce investment.…”

Hidden Stimuli to Capital Formation: Debt and the Incomplete Adjustment of Financial Returns

“…This question has been investigated in a number of studies utilizing variants of the conventional neoclassical user cost of capital, and a general conclusion emerging from this work, shared by policyinakers (White House, 1981), is that the interaction of inflation with the existing tax code has reduced firms' incentives to acquire capital (Feldstein, 1982, Kopcke, 1981. Inflation affects investment decisions by causing variations in the value of tax depreciation deductions, the firm's discount rate, and the cost of debt (as we shall see, the latter two channels are not always identical)..i' In this paper, we reassess the relationship between inflation and investment incentives because previous results are based on a number of tenuous assumptions whose impact has not been fully appreciated.…”

“…It would, however, be misleading to consider only-the effects of inflation on tax depreciation allowances (cf., Kopcke, 1981) when it is well-established that net-of-tax debt costs have also fallen with inflation. Kane, Rosenthal, and Ljung (1983), Peek and Wilcox (1983), Sununers (1983), and Tanzi (1980), among others, have estimated that nominal interest rates have risen at most one-for-one with inflation.…”

“…For a production function with less than unit elasticity, the change in the optimal capital stock would be smaller than the numbers in the table but of the sax sign. Un&er capital structure invariance, the results are independent of leverage, and are presented for asset lives of 5, 10, 20, and 30 years..W It is apparent that investment incentives are reduced for all asset lives by inflation's effect on the value of depreciation allowances with the greatest effects felt by longer-lived assets.It would, however, be misleading to consider only-the effects of inflation on tax depreciation allowances (cf., Kopcke, 1981) when it is well-established that net-of-tax debt costs have also fallen with inflation. Kane, Rosenthal, and Ljung (1983), Peek and Wilcox (1983), Sununers (1983), andTanzi (1980), among others, have estimated that nominal interest rates have risen at most one-for-one with inflation.…”

The Role of Tax Depreciation for Investment Decisions: A Comparison of European Transition Countries

“…The central issue is that the so-called historical cost accounting method, which is applied in practice when calculating the (corporate or income) tax base, causes fictitious profits in inflationary phases that are also subject to tax. This type of increased tax burden is generally called inflation losses (Aaron, 1976;Feldstein, 1979;Streißler, 1982;Gonedes, 1984;Kay, 1977;Kopcke, 1981). Therefore, in periods with inflation generous tax depreciation provisions do not adequately promote private investment as designed, but only (or partly) compensate the losses caused by inflation.…”