The indexation of interest, depreciation, and capital gains and tax reform in the United States

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Abstract

The Treasury's 1984 tax plan suggests features of a comprehensive income tax, including the indexation of interest, depreciation, and capital gains. The 1985 President's proposal retains some of these indexing provisions, but the Tax Reform Act of 1986 does not. This paper looks at the incentives under these tax regimes to make marginal investments in the corporate sector, noncorporate sector, and owner-occupied housing. It finds that inflation in the old system caused effective tax rates to rise for some assets and fall for others. Under the Treasury or President's proposals, the interference of inflation is virtually eliminated. Also, the effects of inflation are substantially reduced by the 1986 Act, because mismeasured depreciation and interest deductions are taken at much lower rates.

Original languageEnglish (US)
Pages (from-to)25-51
Number of pages27
JournalJournal of Public Economics
Volume32
Issue number1
DOIs
StatePublished - Feb 1987
Externally publishedYes

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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