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Optimal tax depreciation under a progressive tax system

  • Wielhouwer, Jacco L.
  • Waegenaere, Anja De
  • Kort, Peter M.

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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Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 27 (2002)
Issue (Month): 2 (December)
Pages: 243-269

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Handle: RePEc:eee:dyncon:v:27:y:2002:i:2:p:243-269
Contact details of provider: Web page: http://www.elsevier.com/locate/jedc

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  1. Wakeman, Lee MacDonald, 1980. "Optimal tax depreciation," Journal of Accounting and Economics, Elsevier, vol. 2(3), pages 213-237, December.
  2. 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.
  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. 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.
  5. repec:ner:tilbur:urn:nbn:nl:ui:12-84062 is not listed on IDEAS
  6. 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.
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