Working Paper: NBER ID: w1941
Authors: Lawrence H. Summers
Abstract: 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.
Keywords: depreciation; investment tax credit; capital budgeting; tax policy
JEL Codes: H25; H32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| depreciation tax shields should be discounted at a low or possibly negative real discount rate (H43) | present value of depreciation allowances (D25) |
| distortion in analysis of tax policies (H31) | effectiveness in stimulating investment (E22) |
| theoretical recommendations (C90) | empirical survey results (C83) |
| high discount rates employed by firms (E43) | distortion in analysis of tax policies (H31) |