Research Discussion Paper – RDP 9011 Inflation and Corporation Taxation in Australia


This paper reviews the effects of inflation and taxation on the financing of corporate investment, and on the allocation of investment among alternative assets. Two tax distortions were of particular importance during the 1980s: the non-taxation of capital gains and the double taxation of dividends. These were important in encouraging corporate leverage and asset acquisition. It is argued that despite their substantial removal in 1985 and 1987 tax reforms, some distortions associated with the interaction of the tax system with inflation remain. In particular, capital gains continue to be treated favourably, and inflation continues to influence investment decisions through its interaction with the treatment of depreciation and nominal interest flows.

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