Investment Incentives and the Discounting of Depreciation Allowances
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.
|Date of creation:||Jun 1986|
|Date of revision:|
|Publication status:||published as Summers, Lawrence H. "Investment Incentives and the Discounting of Depreciation Allowances," The Effects of Taxation on Capital Accumulation, ed. by Martin Feldstein, Chicago: UCP, 1987.|
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- Ruback, Richard S., 1986. "Calculating the market value of riskless cash flows," Journal of Financial Economics, Elsevier, vol. 15(3), pages 323-339, March.
- Roger H. Gordon & James R. Hines, Jr. & Lawrence H. Summers, 1987.
"Notes on the Tax Treatment of Structures,"
in: The Effects of Taxation on Capital Accumulation, pages 223-258
National Bureau of Economic Research, Inc.
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