BPEA | 1978 No. 1

Inflation, Tax Rules, and the Long-Term Interest Rate

Lawrence H. Summers and
Lawrence H. Summers Charles W. Eliot University Professor and President Emeritus - Harvard University
Martin S. Feldstein
Martin S. Feldstein NBER and Harvard University
discussants: William J. Fellner and Robert J. Gordon
Robert Gordon Headshot
Robert J. Gordon Stanley G. Harris Professor of the Social Sciences - Northwestern University

1978, No. 1

ALTHOUGH the return to capital is a focus of research in both macroeconomics and public finance, each specialty has approached this subject with an almost total disregard for the other’s contribution. Macroeconomic studies of the effect of inflation on the rate of interest have implicitly ignored the existence of taxes and the problems of tax depreciation. Similarly, empirical studies of the incidence of corporate tax changes have not recognized that the effect of the tax depends on the rate of inflation and have ignored the information on the rate of return that investors receive in financial markets. Our primary purpose in this paper is to begin to build a bridge between these two approaches to a common empirical problem.