Optimal Tax Depreciation Under a Progressive Tax System

24 Pages Posted: 24 Nov 2000

See all articles by Peter M. Kort

Peter M. Kort

Tilburg University - Department of Econometrics & Operations Research; Tilburg University - Center for Economic Research (CentER)

J. Wielhouwer

VU University Amsterdam

Anja De Waegenaere

Tilburg University - Department of Econometrics & OR, Netspar, and CentER

Abstract

The focus of this paper is on the e ect of a progressive tax system on optimal tax depreciation. By using dynamic optimization we show that an optimal strategy exists, and we provide an analytical expression for the optimal depreciation charges. Depreciation charges initially decrease over time, and after a number of periods the firm enters a steady state where depreciation is constant and equal to replacement investments. This way, the optimal solution trades of the benefits of accelerated depreciation (because of discounting) and of constant depreciation (because of the progressive tax system). We show that the steady state will be reached sooner when the initial tax base is lower or when the discounting effect is stronger.

Keywords: tax depreciation, progressive tax system, discounting, dynamic optimization, path coupling.

Suggested Citation

Kort, Peter and Wielhouwer, Jacco L. and De Waegenaere, Anja M.B., Optimal Tax Depreciation Under a Progressive Tax System. Available at SSRN: https://ssrn.com/abstract=246982 or http://dx.doi.org/10.2139/ssrn.246982

Peter Kort (Contact Author)

Tilburg University - Department of Econometrics & Operations Research ( email )

Tilburg, 5000 LE
Netherlands
+31 13 466 2062 (Phone)
+31 13 466 3072 (Fax)

HOME PAGE: http://center.uvt.nl/staff/kort/

Tilburg University - Center for Economic Research (CentER) ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands
+31 13 466 2062 (Phone)
+31 13 466 3072 (Fax)

Jacco L. Wielhouwer

VU University Amsterdam ( email )

De Boelelaan 1105
Amsterdam, 1081HV
Netherlands

Anja M.B. De Waegenaere

Tilburg University - Department of Econometrics & OR, Netspar, and CentER ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

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