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.
ASJC Scopus subject areas
- Sociology and Political Science