Literature Review

According to Author: Young-Sup Yun university of Washington, reexamines the empirical

relation between inflation and interest rates concentrating on the tax effect. The sample period
in this research paper was 1953-1982. The methodology used in this paper is Ols and random
walk intercept regression. Two things Consumer Price Index (CPI) and housing costs in the CPI
used to calculate the rate of inflation.

According to Nicholas J. Gonedes University of Pennsylvania, There has been substantial

interest rate in the effects of price-level changes and historical cost accounting on real tax
burdens. Variables were used interest rate, inflation rate and tax rate as well.

In this article the work also on real rates of income tax will vary directly with the rate of
inflation which means that relationships between the real rates income of tax and the rate of
inflation in this article. In this article The Consumer Price Index (CPI) is used to measure the rate
of inflation.

The methodology used in this article was multiple regressions and data from “The National
Income and Product Accounts of the United States” 1929-1974.

The authors contain an analysis of the effect of inflation on aggregate tax evasion in the United
States over the period of 1947 to 1981. Further, this paper conducts an empirical investigation
of the relationship between inflation and a measure of aggregate income tax evasion in the
United States. The is used of Durbin Watson test.

In this article the authors explore that the dramatic increase in the real price of housing during
the 1970 with the interaction of increasing inflation with a non neutral tax systems. Further,
there is indication of higher inflation results in a higher real tax rate on corporate held assets.
The data was conducted during 1970 to 1980. And test is used CAPM and correlation. This
research supported by the U.S Department of Housing and Urban Development.
5th article:-

According to ROGER H. GORDON ,work had done on the “ to investigate to what degree an
increase in the inflation rate, given these differences between taxable and economic income
under existing tax law, ought to change corporate investment and financial policy, and cause
capital gains or losses to existing owners of corporate equity. There was also impact of
unexpected inflation on corporate behavior. And discuss about the equilibrium debt-capital
ratio rises when the inflation rate rises. Further, effect of an unexpected rise in inflation on the
value of existing equity unexpected but permanent increase in inflation rate would imply a
possibly significant increase in debt-capital ratios, but little change in investment incentives and
stock market values. The data was collected from 1960 to 1978 US stock market.

6th article:-

According to Martin Feldstein, Harvard University and National Bureau of Economic Research,
Cambridge, Massachusetts, USA “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” in the United States. And also show that the analysis of higher rate of
inflation lowers the real net-of-tax rate of return to the provider of business capital . And also
discuss about the increase in real taxable profits caused by inflation. Further, A higher rate of
inflation reduces the after tax profitability of investment. The collected from the Federal
Reserve Board's Balance Sheets of the U.S. Economy (1976, 1980) and Partial correlation used
in this paper.

7th article:-

F.J. ANDERSON, B.C. BEAUDREAU, and N. C. B 0 N S 0 R / Lakehead University, “Canadian

effective rates are significantly higher than United States rates and both vary positively with
inflation and also showed about effective corporate tax rates are calculated for Canada and the
United States using new investments in the pulp and paper industry. Further, Canadian
effective corporate tax rates are significantly lower than effective rates in the United States.
Effective tax rates are higher for new firms than for old firms, especially in Canada. And
Nominal corporate tax rates are quite a bit higher than effective tax rates, especially in Canada.
Authors showed investment tax credit appeared in the United States in 1962 and Canada
introduced its investment tax credit in 1975. The data collected from the pulp and paper
industry 1977 to 1980.

8th article:-

PETER RANGAZAS Miami University Oxford, Ohio DEWAN ABDULLAH Eastern Michigan
University Ypsilanti, Michigan, there has been an extensive theoretical debate over the role of
corporate financial policy in determining real investment. The evidence in this paper that
increases in the nominal interest rate will encourage firms to increase their debt ratio due to
the tax advantages of bond financing and that the corporate sector debt ratio is generated by
the cost of funds minimizing behavior of firms. Inflation does appear to affect bond and small
stock. The returns on corporate sector debt and small corporate sector stock showed to vary
positively with the debt ratio. Firms should behave as cost of funds minimize when selecting
their debt ratios Further, also discussed that past and present inflation has positive correlation
so then investors would believe that the probability of default rises with inflation. Data
constructed from 1933 to1979 applied regression and correlation.

9th article:-

LIAM P. EBRILL URI M. POSSEN, two assets are considered, namely, equity in owner-occupied
housing and equity in corporations. It is demonstrated that effects of an increase in the rate of
inflation is a shift in asset demand from corporate equity to owner-occupied housing. And also
discussed about effect of changes in the rate of inflation will tend to be capitalized in the prices
of these assets. An increase in the rate of inflation will encourage investors to shift towards any
asset whose returns are subject to relatively low rates of nominal capital income taxation. And
if inflation rate increase then positive effect on the housing price index and negative effect on
the stock price index. Independent variable will be rate of inflation and dependent would be
both assets. The data collected from the Department of Housing and Urban Development,
Annual Housing Survey during 1976. The model tested by OLS and regression analysis. (

10th Article:-

Shalom Hochman and Oded Palmon , showed that the effect of expected inflation on the (pre-
personal-tax) market real rates of return varies across assets. In this article also analyzed that
expected inflation should increase the (pre- personal-tax) market real rate of interest on
taxable bonds; it should reduce the real rate of interest on tax-exempt municipals. These results
are consistent with the empirical findings. And two propositions have to prove in this paper
first, that the real rate of interest on municipals should be inversely related to expected
inflation; and second, that the market real rate of interest on corporate taxable bonds should
be directly related to expected inflation.. The data collected during 1953-1980 period from
United States.

11th Article:-

ROBIN BOADWAY, NEIL BRUCE, KEN McKENZIE, and JACK MINTZ Queen's University, analyzes
that there is a significant difference between the average and the marginal tax rate. The data
had taken from the Department of Energy, Mines and Resources Corporations in Canada during
the 1985. And also took into account that cost of capital and effective tax rate applicable on all
investments. The cost of debt and equity is calculated from current market statistics. . The taxes
encourage exploration and development and processing while discouraging extraction and
other investment. Further, showed that if tax rate is negative then underestimates the firms
and if positive then overestimates the firms in Canada.

12th Article:-

Robert S. Hamada 1978 (May, 1979), there are two principal and modest objectives they are to

“examine the combined effects of taxes and inflation on financial and economic decision-
making” and to “consider these combined effects in the context of some public policy issues.
And the strategy of that analyzes the existence of these taxes when there is inflation. Further,
also work on inflation and tax effects on different assets which vary when change in tax and
inflation rates and also effect on inflation and tax effects on society's total real risk.

13th Article:-

Liam P. Ebrill and Uri M. Possen, showed that an increase in the expected rate of inflation shifts
the composition of aggregate demand. By this paper it is fact American tax system does not
treat all capital assets in the same manner. These authors analyze the implications of inflation
and tax effects for corporate financial policy and for the net real returns on debt and equity
received by asset holders. In this article the model is used of IS-LM model. And paper also
discussed that if implies anti-inflation policy has the additional effect of increasing investment
in corporate capital, raising measured savings.

14th Article:-

Søren Bo Nielsen and Peter Birch Sørensen , deals with the consequences of inflation and capital

income taxes for the accumulation of wealth in a small open economy with a housing sector.
And also discussed that a higher steady rate of inflation or a higher tax rate on ordinary capital
income will induce households to shift from monetary and financial assets into real consumer
assets. And there is indication of rate of inflation increases the effective tax rate on real interest
income. And economy position depends on the strength of capital.

15th Article:-

This paper is about the effects of inflation on the tax system concentrate on some macroeconomic
aspects of the impact of inflation on the tax system on the one hand and also show that the “impact of
the tax system on inflation”. Authors present literature on taxation and inflation focuses mainly
on problems of increases in the real tax burden due to inflation. And also discussed of the
inflationary tax impact on the personal income distribution usually focus on the interactions
between inflation and the personal income tax. To analyze the effects of inflation on the
taxation of capital in the corporate sector. Further, showing that the combined effects of
inflation and taxation on investment.