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Feldstein pointed out that throughout the tax system inflation was turning tolerable paper tax rates into very high effective rates. Corporations, for example, were supposed to pay a tax rate of 42 percent on their profits. Feldstein calculated, however, that when the effects of inflation were taken into account, the true tax on any profits from investing in equipment was more like 75 percent.
You don't need to be a Republican to accept that tax rates this high might discourage investment and hurt economic growth. But was the interaction between inflation and investment really a major villain in America's economic difficulties? There the evidence was less clear. (en) |
