| Sumario: | In a recent article that was published, author Martin Feldstein attributed a crucial share of the failure of share prices to rise during a decade of substantial inflation to basic features of the current U.S. tax laws, particularly historic cost depreciation and the taxation of nominal capital gains. This comment will indicate that Feldstein's model rests on improperly specified asset-demand functions. As a result, the implications of his model are different from those indicated by a more theoretically defensible model based on expected utility maximization. Perhaps most important we show that the implied impact of inflation upon equity share prices is so dependent on the values assumed for certain critical parameters, notably the effective capital gains tax rate, that even the direction to say nothing of the magnitude of the implied impact is unclear. To elucidate the deficiencies in the basic model used by Feldstein, which he considers a market equilibrium model of share valuation in the absence of inflation, authors of this article, for the sake of simplification have initially assumed there are no taxes.
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