Accelerated Depreciation and Income Growth

Abstract

This paper challenges the belief that accelerated depreciation methods are always superior to the straight‐line method—especially for low‐tax bracket owners of highly leveraged investments who have prospects for income growth. The root of the problem is our highly progressive income tax structure and the nature of loan amortization schedules which increase a debtor's taxable income while decreasing his net cash flows. When the entire personal and corporate tax schedules are used to test alternative depreciation methods, our simulation results demonstrate that the much maligned straight‐line method is optimal for suitably low discount rates.