Depreciation methods consistent with economic value decreases

Abstract

Tax neutrality is an important consideration in the design of new tax reform on depreciation. It is because a nonneutral tax system may lead to an inefficient allocation of resources among assets or industries. Confined to depreciation, tax neutrality can be achieved by making tax depreciation equal to economic depreciation. While the problems of measuring economic depreciation and using it as a neutrality measure have been extensively discussed in the literature, relatively little has been dealt with considering the influence of tax depreciation on economic depreciation. In practice, tax depreciation influences cash flows expected from an asset through income tax and thus has an effect on economic depreciation. Therefore, the neutral tax depreciation is not obtained by simply measuring economic depreciation and making tax depreciation coincide with the economic depreciation measured. But the neutral tax depreciation can be obtained by finding a functional relationship between economic and tax depreciations and solving the function analytically to equalize the two depreciations. In this thesis, first, a procedure of measuring economic depreciation is developed considering the fact that tax depreciation has an effect on economic depreciation. And then, neutral tax depreciation is derived by the use of the developed procedure. Though there are various approaches of measuring economic depreciations of used assets, not all of them have the possibilities of incorporating the influence of tax depreciation. An approach called the cost evidence approach is used in this thesis since the approach is able to incorporate tax depreciation in its income expression and thus can consider the influence of tax depreciation on economic depreciation. The neutral tax depreciation of this thesis can be used as a basis to derive tax depreciation schedules offering tax incentives. The tax incentives from a tax depreciation schedule can be represented as the present worth sum of the...