Optimal Tax Depreciation under a Progressive Tax System
AbstractThe focus of this paper is on the effect of a progressive tax system on optimal tax depreciation. By using dynamic optimization we show that an optimal strategy exists, and we provide an analytical expression for the optimal depreciation charges. Depreciation charges initially decrease over time, and after a number of periods the firm enters a steady state where depreciation is constant and equal to replacement investments. This way, the optimal solution trades off the benefits of accelerated depreciation (because of discounting) and of constant depreciation (because of the progressive tax system). We show that the steady state will be reached sooner when the initial tax base is lower or when the discounting effect is stronger.
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Bibliographic InfoPaper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 2000-51.
Date of creation: 2000
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Web page: http://center.uvt.nl
tax depreciation; progressive tax system; discounting; dynamic optimization; path coupling;
Other versions of this item:
- Wielhouwer, Jacco L. & Waegenaere, Anja De & Kort, Peter M., 2002. "Optimal tax depreciation under a progressive tax system," Journal of Economic Dynamics and Control, Elsevier, vol. 27(2), pages 243-269, December.
- Wielhouwer, J.L. & De Waegenaere, A.M.B. & Kort, P.M., 2002. "Optimal tax depreciation under a progressive tax system," Open Access publications from Tilburg University urn:nbn:nl:ui:12-89713, Tilburg University.
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- Berg, Menachem & Waegenaere, Anja De & Wielhouwer, Jacco L., 2001. "Optimal tax depreciation with uncertain future cash-flows," European Journal of Operational Research, Elsevier, vol. 132(1), pages 197-209, July.
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- Kulp, Alison & Hartman, Joseph C., 2011. "Optimal tax depreciation with loss carry-forward and backward options," European Journal of Operational Research, Elsevier, vol. 208(2), pages 161-169, January.
- De Waegenaere, A.M.B. & Wielhouwer, J.L., 2008.
"Dynamic Tax Depreciation Strategies,"
2008-87, Tilburg University, Center for Economic Research.
- Wielhouwer, J.L., 2002. "Optimal Tax Depreciation and its Effects on Optimal Firm Investments," Open Access publications from Tilburg University urn:nbn:nl:ui:12-89396, Tilburg University.
- Adkins, Roger & Paxson, Dean, 2013. "The effect of tax depreciation on the stochastic replacement policy," European Journal of Operational Research, Elsevier, vol. 229(1), pages 155-164.
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