Inflation, Tax Rules, and Capital Formation brings together fourteen papers that show the importance of the interaction between tax rules and monetary policy. Based on theoretical and empirical research, these papers emphasize the importance of including explicit specifications of the tax system in such study.

The present paper analyses the effect of the interaction between tax rules and inflation on the size and allocation of the capital stock with particular emphasis on the role of owner-occupied housing. The analysis is developed in the framework of an economy that is in equilibrium and in which a constant fraction of disposable income is saved. In this model, I show that, with current U.S. tax laws, an increase in the rate of inflation reduces the equilibrium amount of business capital employed in the economy and raises the amount of housing capital. The analysis also shows that a higher rate of inflation lowers the real net-of-tax rate of return to the provider of business capital. In a richer model than the current one, i.e., in a model in which the rate of personal saving was an increasing function of the net rate of return, a higher inflation rate would therefore lower the rate of saving. The present analysis also shows that permitting firms to depreciate investments more rapidly for tax purposes increases the accumulations of business capital but that, unless firms are permitted to expense all in- vestment immediately, an increase in in£ lat ion continues to depress the accumulation of business capital.

Research on capital formation has long been a major focus of studies sponsored by the National Bureau of Economic Research because of the crucial role of capital accumulation in the process of economic growth. The papers in this volume examine the influence of taxes on capital formation, with specific focus on the determinants of saving and the process of investment in plant and equipment.

Feldstein shows how systems of taxation influence the rate and nature of capital formation--key to the development of any economy. His identification of important economic and policy questions, adroit use of modeling and new data, and careful attention to dynamics make this book a powerful addition to the literature.