Inflation, real interest tax wedges, and capital formation

Inflation magnifies the distorting effects of taxation when the tax treatment of interest income and expense is not fully indexed to inflation. The distortion involves a real interest tax wedge which is the difference between the real before tax interest rate that influences fully taxed investors and the real after tax interest rate that influences savers. Reducing the real tax wedge by eliminating inflation or indexing would stimulate private saving and non-residential investment, but decrease tax receipts and the tax deductions that subsidize home ownership.Inflation (Finance) ; Capital ; Taxation ; Interest rates

How fast could inflation be eliminated?

Inflation (Finance) ; Monetary policy - United States

M2 velocity looks to be on a new track

Money supply

Inflation, real interest tax wedges, and capital formation

William G. Dewald, director of research for the St. Louis Fed, examines how inflation magnifies the distorting effects of taxation when the tax treatment of interest income and expense is not fully indexed to inflation. The distortion involves a real interest tax wedge which is the difference between the real before-tax interest rate that influences fully taxed investors and the real after-tax interest rate that influences savers. Reducing the real tax wedge by eliminating inflation or indexing would stimulate private saving and nonresidential investment but decrease tax receipts and the tax deductions that subsidize home ownership.Inflation (Finance) ; Capital ; Taxation

CBO and OMB projections, adjusted for inflation, show federal budget deficit under control

Federal budget deficits continue to dominate discussions of the short-term economic future of the United States. This article by William G. Dewald stands in stark contrast to the aura of pessimism that pervades most such discussions. Dewald’s optimism derives from the inflation adjustment factors he applies to the CBO and OMB deficit projections based on the 1986 Congressional Budget Resolution. He insists that pessimism about deficits stems from a tendency to focus on nominal rather than real (i.e., inflation-adjusted) deficits. Inflation mitigates the burden of a given nominal deficit in two ways: first, it lowers the real interest rate that the government pays, and second, it reduces the real value of publicly held government debt. Dewald claims that if the Budget Resolution is implemented, then by 1990, the ratio of inflation-adjusted publicly held debt to GNP will begin to decline, and the real deficit will be eliminated.Inflation (Finance) ; Budget deficits

Money and deflation in Japan

Currency boards

The base money paradox

Money ; Inflation (Finance)

Monetarism is dead; long live the quantity theory

Gross national product ; Monetary policy ; Monetary theory

Did you know that the Fed holds TIPS?

Inflation-indexed bonds ; Government securities