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Investment Incentives and the Discounting of Depreciation Allowances

In: The Effects of Taxation on Capital Accumulation

  • Lawrence H. Summers

This paper examines the discounting of depreciation allowances both theoretically and empirically. Economic theory suggests that depreciation tax shields should be discounted at the after tax riskless rates. However, a survey of 200 major corporations indicates that they employ much higher discount rates to depreciation allowances. Typical discount rates are in the 15 percent range. This finding suggests that "frontloaded" incentives like the ITC provide maximal stimulus to corporate investment.

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This chapter was published in:
  • Martin Feldstein, 1987. "The Effects of Taxation on Capital Accumulation," NBER Books, National Bureau of Economic Research, Inc, number feld87-1, December.
  • This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 11352.
    Handle: RePEc:nbr:nberch:11352
    Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
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    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

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    1. Ruback, Richard S., 1986. "Calculating the market value of riskless cash flows," Journal of Financial Economics, Elsevier, vol. 15(3), pages 323-339, March.
    2. Roger H. Gordon & James R. Hines Jr. & Lawrence H. Summers, 1986. "Notes on the Tax Treatment of Structures," NBER Working Papers 1896, National Bureau of Economic Research, Inc.
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