Section 263A was added to the Internal Revenue Code by the Tax Reform Act of 1986. This code section applies inventory capitalization rules more uniformly across many industries and strictly increases the cost charged to inventory for tax purposes by increasing the number of cost allocations required [Seago, 1987]. The Treasury thought the changes would increase the economic efficiency of the tax system. These changes, called uniform capitalization, are analyzed by a mathematical model in this dissertation. The results reverse the conventional wisdom of the Treasury and show that the changes lead to less, not more efficient behavior and, under some reasonable assumptions, this inefficiency leads to decreases in inventory holding and production. This dissertation contains the development of a mathematical model of uniform capitalization, performs an economic analysis of the model, and advances the conclusion that uniform capitalization causes productively inefficient behavior. The provisions of §263A that required more costs to be allocated and more industries to be covered created the inefficiency. The results show that the rules are uniform, but uniformly bad, because productive efficiency is decreased. The uniformity of the system is not the problem. The increased number of cost allocations required is the problem with §263A. Uniform capitalization has no affect on allocative efficiency because it changes the tax treatment of input, not outputs. This dissertation also contains the development of a mathematical model of firm output and inventory holding decisions and advances the conclusion that under LIFO inventory and some reasonable cost assumptions, production and inventory holding decrease because the inefficient tax act increases production costs. The mathematical results are consistent with the intuition developed. / Ph. D.