Economic Depreciation, Accrual Taxation, and the Samuelson Theorem: An Essay on the Structure of Capital Income Taxation

Abstract:     
Samuelson (1964) showed that an income tax with an allowance for "economic" depreciation leads to asset valuations that are independent of their holders’ marginal rates of tax. The tax system is then "neutral," in the sense that assets have the same value to all, irrespective of whether or at what rate they are taxed. In this essay I illustrate and show formally that taxation of cash flow minus an allowance for economic depreciation leads to the taxation of value as it accrues. That is, economic depreciation and pure accrual taxation are exactly equivalent. I suggest also that the form of "depreciation" allowance that gives rise to this result has implications for neutral taxation of capital income that extend beyond depreciation as such, and may help to improve our understanding of some of the historically more vexing details of property income taxation.

Number of Pages in PDF File: 38

Keywords: capital income taxation, economic depreciation, accrual taxation

JEL Classification: H21, H25, K34

working papers series