Economic Depreciation, Accrual Taxation, and the Samuelson Theorem: An Essay on the Structure of Capital Income Taxation
38 Pages Posted: 31 Mar 2012 Last revised: 3 Apr 2012
Date Written: March 30, 2012
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.
Keywords: capital income taxation, economic depreciation, accrual taxation
JEL Classification: H21, H25, K34
Suggested Citation: Suggested Citation