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The inflation causes an increase in the real corporate tax burden for inventory-intensive firms

Prior theoretical studies argue that the current tax system increases the real corporate tax burden in the presence of inflation. The argument presented in these studies hinges on the fact that inflation decreases the real value of tax deductions that are based on historical cost (i.e., depreciation and cost of goods sold). More specifically, because the current system taxes nominal income, corporate taxable receipts increase at the rate of inflation. Tax deductions for depreciation and cost of goods, on the other hand, are based on historical cost accounting rather than on inflation-indexed or current asset values. As a result, nominal taxable income for capital- and inventory-intensive firms increases at a higher rate than inflation, thus increasing the real tax burden for these firms.

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