Capital Decay and Tax Distortions: How to Abandon Exponential Decay and Benefit from It

Erik Biorn

No 27/2009, Memorandum from Oslo University, Department of Economics

Abstract: The appropriate way of quantifying how taxation of a firm's income and capital can distort its optimizing conditions is a recurring issue in the literature on optimal taxation. Exponential decay, although empirically contested, is almost ubiquitous. In the present paper a generalized framework which allows for a general, non-exponential, decay pattern for both true and tax-permitted depreciation, is considered. Both convex and concave survival functions can be accommodated. Three capital concepts are involved, two of which coincide under exponential decay. The trade-off between various departures from neutrality is illustrated. Elements which contribute to non-neutrality are: (i) discrepancy between the defnition of the tax-relevant accounting capital and true depreciation, (ii) mis-indexation of depreciation allowances, (iii) incomplete deductibility of interest costs, (iv) asymmetric treatment of interest costs and capital gains, and (v) taxation of the value of the capital stock. Finally, we show that substantial biases can arise in assessing the degree of non-neutrality if non-exponential depreciation schedules are forced, by `approximation devices', to ft into the exponential decay schedule.

Keywords: Capital taxation; Taxable income; Tax-neutrality; Tax distortion; Survival func- tion; Capital service price; Non-exponential decay; Depreciation; Indexation (search for similar items in EconPapers)
JEL-codes: D61 E22 H21 H25 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2009-12-28
New Economics Papers: this item is included in nep-acc and nep-pub
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.sv.uio.no/econ/english/research/unpubl ... 009/Memo-27-2009.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:hhs:osloec:2009_027

Access Statistics for this paper

More papers in Memorandum from Oslo University, Department of Economics Department of Economics, University of Oslo, P.O Box 1095 Blindern, N-0317 Oslo, Norway. Contact information at EDIRC.
Bibliographic data for series maintained by Mari Strønstad Øverås ().