Depreciation Policy During Carnival: The New 50 Percent Bonus Depreciation

Abstract:     
The Tax Relief Act of 2003 allows one-half of the cost of most equipment to be deducted immediately. Bonus depreciation is irresponsible, Professor Johnson argues, because it generates a negative tax for debt-financed investments that is like the government paying for 27 percent of the cost of privately held equipment. The negative tax is both expensive and does harm, he says. Under the assumptions of Johnson's model, investments in equipment that returns only 70 percent of the prevailing fair market value interest rates can go forward. That will mean, Johnson says, that inferior investments will outbid better investments and waste precious capital. Wasting capital, he claims, will choke potential growth and destroy jobs. Johnson argues that bonus depreciation must have passed because of the carnival atmosphere.

Number of Pages in PDF File: 9

Keywords: Tax Depreciation, Bonus Depreciation, ACRS Depreciation

JEL Classification: H21, H25

Accepted Paper Series