Research Discussion Paper – RDP 9012 Some Calculations on Inflation and Corporate Taxation in Australia
December 1990
Abstract
This paper presents calculations of the effects of inflation on corporate tax liabilities in Australia. Inflation distorts the measurement of taxable corporate income in three main ways: it reduces the real value of depreciation allowances, creates artificial holding gains on inventories, and causes overstatement of the cost of debt financing under a nominal-interest accounting system. The first two of these effects work in the direction of overstating taxable income, while the third works in the opposite direction. The calculations suggest that in aggregate, inflation has increased effective tax rates on corporate income, with the largest effects occurring with a lag of several years after periods of high inflation.