Whither Tax Depreciation?

Abstract

In the 15 years since the depreciation rules were calcu- lated to approximate economic depreciation for structures and equip- ment, that neutrality (using a constant set of economic deprecia- tion estimates) has been somewhat undermined by a relatively more favorable treatment of equipment due to lower inflation and a length- ening of class lives for structures. An argument can be made that shorter lives for structures is in order; however, there is also a move- ment to provide tax benefits for equipment, which be- comes rapidly obsolescent. This focus on short-lived, high tech as- sets 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 as-