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Front Page  Titles (by Subject) Inflation Effects on Capital - Literature of Liberty, July/September 1979, vol. 2, No. 3
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Inflation Effects on Capital - Leonard P. Liggio, Literature of Liberty, July/September 1979, vol. 2, No. 3 [1979]Edition used:Literature of Liberty: A Review of Contemporary Liberal Thought was published first by the Cato Institute (1978-1979) and later by the Institute for Humane Studies (1980-1982) under the editorial direction of Leonard P. Liggio.
Part of: Literature of Liberty: A Review of Contemporary Liberal Thought, 20 vols. 19781-982
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Inflation Effects on Capital“Inflation and Taxes: Disincentives for Capital Formation.” Federal Reserve Bank of St. Louis Review 60 (1978): 2–8. The tax laws levy on nominal returns and permit depreciation only on historical costs. For a firm to keep up (in real terms) with inflation, it ought to depreciate on replacement costs; and it ought not be taxed on the increase in nominal income that is necessary solely to maintain the firm's balance sheet as it was before inflation. Since these effects are ignored in our current tax laws, “taxes are being levied not only on the income generated by the capital, but also on the capital itself. This taxation reduces the incentives of firms to invest.” Likewise, progressive taxation of personal income requires the investor to earn a higher pre-tax return if his after-tax return is to be the same as in a noninflationary environment. An economic environment of high taxes and inflation raises the firm's cost of acquiring capital at a time when their after-tax return is falling. These factors will profoundly distort future economic growth and well-being. We cannot “learn to live with inflation” and maintain our standard of living. Either politicians must substantially revise the tax laws (which seems unlikely), or we must adopt monetary and fiscal policies to reduce or eliminate price inflation. 
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