Inflation,CorporateProfits,andtheRateofReturntoCapital.pdf

This PDF is a selection from an out-of-print volume from the National Bureau of Economic Research Volume Title: Inflation: Causes and Effects Volume Author/Editor: Robert E. Hall Volume Publisher: University of Chicago Press Volume ISBN: 0-226-31323-9 Volume URL: /books/hall82-1 Publication Date: 1982 Chapter Title: Inflation, Corporate Profits, and the Rate of Return to Capital Chapter Author: Jeremy I. Bulow, John B. Shoven Chapter URL: /chapters/c11461 Chapter pages in book: (p. 233 - 260) 11 Inflation, Corporate Profits, and the Rate of Return to Capital Jeremy I. Bulow and John B. Shoven 11.1 Introduction In the 1960s and 1970s the United States experienced a substantial increase in both the rate of inflation and the variance of this rate. This fact has made conventional nominal financial accounts difficult to interpret, and it has made accounting for inflation and changing prices an important subject for both economists and accountants. Assertions have been made that distorted inventory profits and the failure to index depreciation allowances for inflation have caused reported corporate profit figures to be exaggerated and have increased the tax rate on real corporate earn- ings. The results of this paper show that this view was predicated on incomplete adjustments for inflation, and our real profit measures contra- dict the commonly held conclusion that profits have been overstated. If one wants to calculate complete and consistent inflation-adjusted accounts, the liabilities of the firm must be included in the process in addition to the tangible assets which receive the most attention. In this paper we briefly discuss the value of adjusting profit figures for inflation and describe two alternative approaches (one based on balance sheets and the other on income statements). We discuss the individual factors involved and describe the supplementary inflation accounting information now being req