Policy Documents

Case Study #5: Accelerated Depreciation

Michael Schuyler, and Stephen J. Entin –
August 2, 2013

In this study, the authors write that businesses can recognize most of their labor costs on their tax returns when they incur the costs but must typically deduct their investment costs over many years. Under a consumed income, or personal expenditure, tax, investment costs would be deducted when they occur, which is the optimal treatment for reaching the most economically efficient level of capital formation. Under an income tax adhering to the Haig-Simons definition of income, investment costs would be written off only as investments lose economic value over time. Economic depreciation has two problems. First, it is impossible to measure, because similar assets in different uses wear out or become obsolete at different rates. Second, the concept ignores the cost of locking up money in an asset from the date of its purchase, which reduces investment.