Historical Cost, Inflation, and the US Corporate Tax Burden

50 Pages Posted: 12 Oct 2013 Last revised: 8 Mar 2015

See all articles by Dan S. Dhaliwal

Dan S. Dhaliwal

University of Arizona - Department of Accounting (deceased)

Fabio B. Gaertner

University of Wisconsin - Madison - Department of Accounting and Information Systems

Hye Seung Lee

Fordham University - Accounting Area

Robert Trezevant

University of Southern California - Leventhal School of Accounting

Date Written: March 1, 2015

Abstract

We study whether the interaction between U.S. tax rules and inflation increases the real U.S. corporate tax burden because tax deductions based on historical cost are not inflation-indexed. We extend prior literature by using new models to examine this prediction. We find a significantly positive association between tax burden and inflation for capital- and inventory-intensive firms, even after they utilize inflation-mitigating tax law provisions. We also find that the LIFO inventory method mitigates inflation-induced tax distortions. These results provide evidence that capital- and inventory-intensive firms face a higher real tax burden in the presence of inflation.

Keywords: Inflation, historical cost, corporate tax burden

JEL Classification: H20, H25, M41

Suggested Citation

Dhaliwal, Dan S. and Gaertner, Fabio B. and Lee, Hye Seung and Trezevant, Robert, Historical Cost, Inflation, and the US Corporate Tax Burden (March 1, 2015). Journal of Accounting and Public Policy, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2339256 or http://dx.doi.org/10.2139/ssrn.2339256

Dan S. Dhaliwal

University of Arizona - Department of Accounting (deceased)

Fabio B. Gaertner (Contact Author)

University of Wisconsin - Madison - Department of Accounting and Information Systems ( email )

School of Business
975 University Avenue
Madison, WI 53706
United States

Hye Seung Lee

Fordham University - Accounting Area ( email )

Graduate School of Business
113 W. 60th Street
New York, NY 10023
United States

Robert Trezevant

University of Southern California - Leventhal School of Accounting ( email )

Los Angeles, CA 90089-0441
United States
213-740-5013 (Phone)
213-747-2815 (Fax)

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