How Inflation Destroys Value: Taxes

Abstract

La versión española de este artículo se puede encontrar en: http://ssrn.com/abstract=1125625.

The return on investments depends on the effects of inflation. To analyze the effect of inflation, we shall use a case study of two companies engaging in the same business and in identical market conditions but in two countries with very different inflation rates. The problem of inflation and its consequences is expressed very clearly. And its solution is very simple. When inflation is high, company earnings are artificially high (i.e., not caused by an improvement in the company’s situation), which means that the tax paid is higher than if there was no inflation. Consequently, investments’ real return is smaller.

Keywords: Value, inflation, free cash flow, equity cash flow

JEL Classification: G12, G31, M21