Title

Inventories, Investment, Inflation and Taxes

Authors

James Tobin

Document Type

Discussion Paper

Publication Date

9-1-1987

CFDP Number

849

CFDP Pages

19

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-à-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.

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