The Pennsylvania State University. I am grateful for the comments and suggestions of Charles Nelson of the University of Washington and the Finance Workshop at Penn State. This research was completed while the author was at the University of Georgia.
Taxes and the Fisher Effect: A Clarifying Analysis
Article first published online: 30 APR 2012
1983 The American Finance Association
The Journal of Finance
Volume 38, Issue 1, pages 67–77, March 1983
How to Cite
MILES, J. A. (1983), Taxes and the Fisher Effect: A Clarifying Analysis. The Journal of Finance, 38: 67–77. doi: 10.1111/j.1540-6261.1983.tb03626.x
- Issue published online: 30 APR 2012
- Article first published online: 30 APR 2012
Supply and demand functions for loanable funds are postulated for a no-inflation economy and equilibrium levels of saving, investment, and the interest rate are specified. Certainty and nondepreciating assets are assumed. An exogenous inflation rate is imposed upon this same economy and new equilibrium values for these same variables are established. The analysis is performed twice. The first time, a Modigliani-Miller  tax structure is assumed while the second analysis assumes a Miller-Scholes  tax structure. In both cases, inflation causes the nominal rate to increase by more than the inflation rate. The analysis is repeated assuming that investments live for one period and are then written off against taxable income at historical cost. In both tax structures, the level of saving and investment is a decreasing function of the inflation rate.