Accelerating Depreciation in Recession

57 Pages Posted: 10 Feb 2017 Last revised: 28 Jun 2019

See all articles by Rebecca Morrow

Rebecca Morrow

Wake Forest University - School of Law

Date Written: 2016

Abstract

What would you do if on January 13, 2016, you had won the $1.5 billion Powerball jackpot? The prize gives you the choice of a smaller lump sum now or the full jackpot parceled out for years to come. For the New York Times and numerous financial experts, the right choice is clear: take the money over time. While lump sums are nice, they are not worth a big discount when compared to “ultrasafe” income streams (like the Powerball annuity), especially in an “ultralow interest rate environment.”

What everyone understands about Powerball seems to elude us when it comes to the United States’ largest corporate tax expenditure. “Accelerated depreciation” rules give taxpayers a lump sum deduction now, rather than the gradual deductions they would normally claim. Called tax law’s “standard method for combating recessions,” accelerated depreciation has become the most important tax policy affecting businesses because it is thought to be an effective if costly way to stimulate the economy, particularly during tough economic times.

I argue, to the contrary, that accelerated depreciation debates ignore the lessons of Powerball. Like lottery payments, gradual depreciation deductions are highly certain, making them far more valuable than has been assumed. As a result, replacing them with accelerated depreciation is far less valuable than has been assumed. Further, the benefits of accelerated depreciation plummet during and following recession — precisely when these policies tend to be expanded. I illustrate these points with a numerical example exposing when real firms paid extra taxes (and the government collected extra revenue) as a result of the government’s purported stimulus program.

Keywords: Accelerated Depreciation, Immediate Expensing, Recession, Discounting, Risk

Suggested Citation

Morrow, Rebecca, Accelerating Depreciation in Recession (2016). 19 Florida Tax Review 465 (2016). Available at SSRN: https://ssrn.com/abstract=2914647

Rebecca Morrow (Contact Author)

Wake Forest University - School of Law ( email )

P.O. Box 7206
Winston-Salem, NC 27109
United States

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