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73 IRET Policy Bulletin 1 (1998)

handle is hein.taxfoundation/iretpbul0032 and id is 1 raw text is: v w mu No. uOctober 20, 1998 ~ No. 73 PRESERVING GROWTH THROUGH SENSIBLE TAX REDUCTIONS Recent monetary policy has been extraordinarily conducive to economic growth by fostering low inflation and stable interest rates. Falling inflation (Chart 1 below) has been a major force driving the current expansion. With inflation near zero, however, further improvement in economic performance must come from sensible growth-oriented tax changes. The purpose of this paper is to explain (1) how falling inflation has contributed to the current expansion; (2) why, given almost zero inflation, this source of strength has contributed about all that it can to bolster the economy's strength; and (3) the fiscal policy measures that can provide the means for further expansion. Given the adverse international economic situation, implementing the policies presented here is particularly urgent. Transitory Growth Effects of Reduced Inflation Inflation reduces the real value of the capital consumption Chart 1 Consumer Price Index (CPI) Growth Rate allowances that businesses may deduct as the cost of their plant, equipment, and structures in determining their taxable incomes. Inflation similarly lowers the real .............. value of deductions for the cost of inventory. Thus, inflation leads to an understatement of real business ..............................................................2 costs, an overstatem ent of real .................................................................. business income, and a higher i i i i i i i i i effective tax rate on the earnings 1 10 1 199 1 19419 of the capital assets em ployed by Fedra Rer Ban ol ear businesses. A decrease in the rate of inflation, such as we have been Institute for IRET is a non-profit, tax exempt 501(c)3 economic policy research and educational Research organization devoted to informing the public about policies that will promote on the economic growth and efficient operation of the market economy. Economics of 1730 K Street, N.W., Suite 910 e Washington, D.C. 20006 Taxation (202) 463-1400 * Fax (202) 463-6199 e Internet www.iret.org

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