Uncertainty, Welfare Cost, and the 'Adaptability' of U.S. Corporate Taxes

25 Pages Posted: 5 Jul 2004

See all articles by Don Fullerton

Don Fullerton

University of Illinois at Urbana-Champaign - Department of Finance; National Bureau of Economic Research (NBER); CESifo (Center for Economic Studies and Ifo Institute)

Andrew B. Lyon

PricewaterhouseCoopers LLP

Richard J. Rosen

Federal Reserve Bank of Chicago - Economic Research

Date Written: November 1983

Abstract

Alternative corporate tax systems differ in their ability to adapt to changes in the rate of inflation. Absent complete indexing of depreciation allowances, a tax system may use the expected inflation rate to set accelerated depreciation allowances in a way that minimizes the welfare loss from them is allocation of capital. This welfare loss is a nonlinear function of the assumed inflation rate, however, so the welfare loss at the expected inflation rate may be quite different from the expected welfare loss. We compute these two welfare concepts for each of three alternative corporate tax schemes in the U.S. and for two different relationships between inflation and interest rates. One important finding is that the Auerbach-Jorgenson first year recovery plan is not equivalent to indexing as is often claimed, if uncertainty about inflation implies uncertainty about the real after-tax discount rate.

Suggested Citation

Fullerton, Don and Lyon, Andrew B. and Rosen, Richard J., Uncertainty, Welfare Cost, and the 'Adaptability' of U.S. Corporate Taxes (November 1983). NBER Working Paper No. w1239. Available at SSRN: https://ssrn.com/abstract=321293

Don Fullerton (Contact Author)

University of Illinois at Urbana-Champaign - Department of Finance ( email )

1206 South Sixth Street
Champaign, IL 61820
United States
(217) 244-3621 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Andrew B. Lyon

PricewaterhouseCoopers LLP ( email )

600 13th Street, NW, Suite 1000
Washington, DC 20005
United States
202-414-3865 (Phone)

Richard J. Rosen

Federal Reserve Bank of Chicago - Economic Research ( email )

230 South LaSalle Street
Chicago, IL 60604
United States
312-322-6368 (Phone)
312-294-6262 (Fax)

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