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Inventories, Investment, Inflation and Taxes

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Abstract

Sales today were made possible by inputs of factor services and intermediate goods at various previous dates. Prices change between the input dates and the sale date. Especially in periods of general inflation, these price movements create ambiguities in the reckoning of profits. The accounting definition used in taxing profits can have significant economic effects. Tax accounting is generally not neutral vis-a-vis general inflation. Costing inputs at their historical nominal prices (FIFO) is a real burden and disincentive, greater the higher the inflation rate. It is analogous to depreciating durable capital at historical cost. However, it may be partially, completely, or excessively offset by another non-neutrality, the deductibility of nominal interest from taxable income. This too has analogous effects on after-tax returns from fixed capital.

Suggested Citation

  • James Tobin, 1987. "Inventories, Investment, Inflation and Taxes," Cowles Foundation Discussion Papers 849, Cowles Foundation for Research in Economics, Yale University.
    • Handle: RePEc:cwl:cwldpp:849
    Note: CFP 712.
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    References listed on IDEAS

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    1. Murray F. Foss & Gary Fromm & Irving Rottenberg, 1981. "Measurement of Business Inventories," NBER Books, National Bureau of Economic Research, Inc, number foss81-1.
    2. Feldstein, Martin, 2009. "Inflation, Tax Rules, and Capital Formation," National Bureau of Economic Research Books, University of Chicago Press, number 9780226241791, September.
    3. Eugeive Steuerle, 1982. "Is Income From Capital Subject To Individual Income Taxation?," Public Finance Review, , vol. 10(3), pages 283-303, July.
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