Historical Cost, Inflation, and the US Corporate Tax Burden

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.