Depreciation Lives and Methods: Current Issues in the U.S. Capital Cost Recovery System

Abstract

In part because of concerns that the tax depreciation system may be dated and may not properly measure income, Con- gress directed that the Treasury study the current tax depreciation system. This paper is derived from the staff work for the Treasury Study. The paper first discusses the rationale for a depreciation al- lowance. It next describes the current tax depreciation system. Using the cost of capital, the paper evaluates the current tax depreciation system. It then discusses several comprehensive reforms of the tax depreciation system, and calculates the effects of these reforms on the cost of capital. The final section discusses several practical prob- lems with the current tax depreciation system.