Investment Incentives and the Discounting of Depreciation Allowances
21 Pages Posted: 8 Jun 2004 Last revised: 7 Sep 2008
Date Written: June 1986
This paper examines the discounting of depreciation allowances boththeoretically and empirically. Economic theory suggests that depreciation taxshields should be discounted at the after tax riskless rates. However, asurvey of 200 major corporations indicates that they employ much higherdiscount rates to depreciation allowances. Typical discount rates are in the15 percent range. This finding suggests that "frontloaded" incentives likethe ITC provide maximal stimulus to corporate investment.
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