Inflation hedge - relation with taxation

CFA Level III Equities
#1

Guys,

Can anyone better explain the comment below?

“Because corporate income and capital gains tax rates are not indexed to inflation, inflation can reduce the stock investor’s return, unless this effect was priced into the stock when the investor bought it”.

What does taxation have to do with the return (since its fixed) and inflation?

#2

If I sold you something and you paid $X because you thought you would get $Y from it over a couple of years. Oh SNAP turns out you forgot to factor in taxes and inflation in your $Y income. Don’t you wish you paid less than $X for the building I sold you? decrease in value = decrease in return

#3

The prices corporations charge to their end consumers have an implied inflation expectation built into them. If I were a corporation and the nominal price for my products did not account for inflation properly, then my real return/earnings would be lower than I would have hoped for otherwise. That’s why in a hyperinflationary environment, corporate earnings are difficult to comprehend, as an investor should be willing to pay for a corporation’s ability to generate real earnings and pay a price multiple related to the real earnings growth rate. I hope that this makes sense. That’s why moderate inflation is fine, as it can be accounted for and more often than not, passed onto the end consumer in annual price hikes. Think of banking fees, utility fees, telecom fees (although as an industry becomes more competitive, it gets harder to pass along those inflationary pressures - lower margins - Porters five forces - level 1)

#4

I see. I just can’t get what taxes on income have to do with it all. They are usually flat - a percentage over sales. Or in the case of tax on income even more - its fixed although it depends on the country.

#5

If you as a company are able to pass on your taxes and inflation to your customers - you are going to get lower returns each year. You earn more by way of goods sold (sales are higher) but taxes and inflation eat into what you made, so your returns (as a % of Profit over higher sales are going to fall) …