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Optimal tax depreciation under a progressive tax system

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Author Info

  • Wielhouwer, J.L.

    (Tilburg University)

  • De Waegenaere, A.M.B.

    (Tilburg University)

  • Kort, P.M.

    (Tilburg University)

Abstract

The 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 Info

Paper provided by Tilburg University in its series Open Access publications from Tilburg University with number urn:nbn:nl:ui:12-89713.

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Date of creation: 2002
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Publication status: Published in Journal of Economic Dynamics and Control (2002) v.27, p.243-269
Handle: RePEc:ner:tilbur:urn:nbn:nl:ui:12-89713

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Web page: http://www.tilburguniversity.edu/

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References

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  1. 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.
  2. Wakeman, Lee MacDonald, 1980. "Optimal tax depreciation," Journal of Accounting and Economics, Elsevier, vol. 2(3), pages 213-237, December.
  3. Burness, H Stuart & Patrick, Robert H, 1992. "Optimal Depreciation, Payments to Capital, and Natural Monopoly Regulation," Journal of Regulatory Economics, Springer, vol. 4(1), pages 35-50, March.
  4. Wielhouwer, J.L. & De Waegenaere, A.M.B. & Kort, P.M., 2000. "Optimal dynamic investment policy for different tax depreciation rates and economic depreciation rates," Open Access publications from Tilburg University urn:nbn:nl:ui:12-84062, Tilburg University.
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Cited by:
  1. 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.
  2. 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.
  3. De Waegenaere, A.M.B. & Wielhouwer, J.L., 2008. "Dynamic Tax Depreciation Strategies," Discussion Paper 2008-87, Tilburg University, Center for Economic Research.
  4. 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.

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