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Inflation, Taxation and Corporate Investment in the U.S. During the Great Inflation

Author(s)
Usenko, Yevhenii
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Advisor
Verner, Emil
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In Copyright - Educational Use Permitted Copyright retained by author(s) https://rightsstatements.org/page/InC-EDU/1.0/
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Abstract
U.S. corporate taxation is not neutral to inflation. Two of its features – historical cost depreciation and FIFO inventory accounting – are expected to lower real after-tax corporate cash flows and, thereby, make investment less attractive when expected inflation is elevated. Using Compustat data for 1965-1980 and a difference-in-differences research design, I do not find evidence in support of this hypothesis. I discuss possible explanations for this non-result. In addition, I find a robust effect of statutory tax changes on corporate investment during the Great Inflation. The effect is economically meaningful and consistent with the prior literature: a tax reform that increases firm's cost of capital by 10% lowers investment of affected firms by 2 percentage points of total assets relative to firms not affected by the reform.
Date issued
2023-06
URI
https://hdl.handle.net/1721.1/151562
Department
Sloan School of Management
Publisher
Massachusetts Institute of Technology

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