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

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.

Name thesis:degree_name

Master

Department dc:contributor.department

Sloan School of Management

Grantor dc:publisher

Massachusetts Institute of Technology

Year dc:date.issued

2023

Author dc:creator

• Usenko, Yevhenii

Advisor dc:contributor.advisor

• Verner, Emil

Statement dc:rights

• In Copyright - Educational Use Permitted
• Copyright retained by author(s)

Licence dc:rights.uri

• https://rightsstatements.org/page/InC-EDU/1.0/

Handle dc:identifier.uri

https://hdl.handle.net/1721.1/151562

OAI identifier oai:identifier

oai:dspace.mit.edu:1721.1/151562