Flashback, yea, its good to read from you as well.
Logically, your explanation make sense, I have also analysed it from this angle.
So "if inflation increases, say a real estate asset, it will increase in value right. Also, we expect the expenses in maintaining the asset to increase as well as depreciation.
So, let us try with figures…
Say the value of an asset is 100 without inflation, with depreciation being 25% of the asset value, as well as a tax rate of 40%.
Depreciation expense = 100 * 25% = 25
Tax savings = 25 * 40% = 10.
Now assume inflation increases the net value to 120,
Dep expense = 120 * 25% = 30
Tax savings = 30 * 40% = 12.
So, can you see my point, tax savings increases due to the fact that the tax rate remained unchanged.
Maybe i am seeing this the wrong way though, but i really need an intervention here…
So back to you Flashback…