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Optimal Tax Depreciation under a Progressive Tax System

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  • Wielhouwer, J.L.

    (Tilburg University, School of Economics and Management)

  • De Waegenaere, A.M.B.

    (Tilburg University, School of Economics and Management)

  • Kort, P.M.

    (Tilburg University, School of Economics and Management)

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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Suggested Citation

  • Wielhouwer, J.L. & De Waegenaere, A.M.B. & Kort, P.M., 2000. "Optimal Tax Depreciation under a Progressive Tax System," Other publications TiSEM c75283a4-d96b-457b-9efb-e, Tilburg University, School of Economics and Management.
    • Handle: RePEc:tiu:tiutis:c75283a4-d96b-457b-9efb-e05fe68a74a0
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    References listed on IDEAS

    as
    1. J. L. Wielhouwer & A. De Waegenaere & P. M. Kort, 2000. "Optimal Dynamic Investment Policy for Different Tax Depreciation Rates and Economic Depreciation Rates," Journal of Optimization Theory and Applications, Springer, vol. 106(1), pages 23-48, July.
    2. Wakeman, Lee MacDonald, 1980. "Optimal tax depreciation," Journal of Accounting and Economics, Elsevier, vol. 2(3), pages 213-237, December.
    3. 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.
    4. 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.
    5. 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.
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    1. De Waegenaere, A.M.B. & Wielhouwer, J.L., 2008. "Dynamic Tax Depreciation Strategies," Discussion Paper 2008-87, Tilburg University, Center for Economic Research.
    2. Wielhouwer, J.L., 2002. "Optimal tax depreciation and its effects on optimal firm investments," Other publications TiSEM 822d5150-6b3a-463a-8001-4, Tilburg University, School of Economics and Management.
    3. 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.
    4. Arkin Vadim & Arkina Svetlana & Slastnikov Alexander, 2003. "Investment Stimulation by a Depreciation Mechanism," EERC Working Paper Series 02-05e, EERC Research Network, Russia and CIS.
    5. 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.
    6. De Waegenaere, A.M.B. & Wielhouwer, J.L., 2008. "Dynamic Tax Depreciation Strategies," Other publications TiSEM 53102e34-40e3-4c31-a426-9, Tilburg University, School of Economics and Management.
    7. Hagen Ackermann & Martin Fochmann & Nadja Wolf, 2016. "The Effect of Straight-Line and Accelerated Depreciation Rules on Risky Investment Decisions—An Experimental Study," IJFS, MDPI, vol. 4(4), pages 1-26, October.

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