Whither Tax Depreciation?

Abstract

In the 15 years since the depreciation rules were calculated to approximate economic depreciation for structures and equipment, that neutrality (using a constant set of economic depreciation estimates) has been somewhat undermined by a relatively more favorable treatment of equipment due to lower inflation and a lengthening of class lives for structures. An argument can be made that shorter lives for structures is in order; however, there is also a movement to provide tax benefits for "high tech" equipment, which becomes rapidly obsolescent. This focus on short-lived, high tech assets may be misplaced because the pace of technological advance is unlikely to be sustained at a high level, short-lived assets have a built-in protection against lives that are too long because their costs can be deducted on discard, and short-lived assets are likely to be less sensitive to changes in rate of return than are long-lived assets. From an administrative point of view, the current system (which limits the Treasury's ability to assign asset classes) is rigid and does not provide for on-going depreciation research.