Casey Mulligan writes about how inflation distorts the corporate-income tax:
As inflation rises, as it did in 2021 and 2022, many businesses see their revenue, labor costs, and materials costs increase together. However, the depreciation expense stays fixed, because the IRS defines depreciation according to what the business paid in the past for its capital, rather than what it would pay now to replace and maintain the capital it uses during the course of doing business. This makes a business’s income subject to tax — and its tax liability — grow faster than its revenue, labor costs, and materials costs. If inflation were high enough, it would about double the share of revenue going to corporate tax, even with no change in the statutory 21 percent rate.
To the extent that inflation is expected to continue, the inflation tax on business discourages investment today because businesses expect that the government will get a bigger slice of the proceeds from today’s investment. Indeed, the two-percentage-point increase in corporate bond rates suggests that market participants do not see today’s inflation as entirely transitory.
Read the whole thing here.