Optimal tax depreciation under a progressive tax system
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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- William J. Baumol, 1971. "Optimal Depreciation Policy: Pricing the Products of Durable Assets," Bell Journal of Economics, The RAND Corporation, vol. 2(2), pages 638-656, Autumn.
- 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.
- Wakeman, Lee MacDonald, 1980. "Optimal tax depreciation," Journal of Accounting and Economics, Elsevier, vol. 2(3), pages 213-237, December.
- 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.
- 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," Other publications TiSEM 1b887e80-c43f-41dd-aa3c-2, Tilburg University, School of Economics and Management.
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